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U5B8   Brovm  - 

Two  essays  on  the 

taxation  uT  mi- 

earned  incomes. 


Southern  Branch 
of  the 

University  of  California 

Los  Angeles 

Form  L   1 


This  book  is  DUE  on  the  last  date  stamped  below 

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^  9  l92r' 

NOV  -To  19M 

ilov  i<    i;6^ 

JAN  ?^      1927 
JAN  6      192^ 

'^  14  192£' 
^ju'i   X^    ia2c 

FEB  19   mi. 

JAN  7     1^38 
JAN  2  8  1936 

Form  L-9-15m-10.25 


MAY  15  1938 


THE   TAXATION 

OF 

UNEARNED  INCOMES 


TWO  ESSAYS  ON 


THE  TAXATION  OF  UNEARNED 
INCOMES 


HARRY  GUNNISON  BROWN 

PROFESSOR    OF  ECONOMICS  IN  THE    UNIVERSITY  OE  MISSOURI 


Authoi  of 
''Principles  of  Commerce' 

"Transportation  Rates  and  Their  Regulation"  ■ 
"The  Theory  of  Earned  a}id  Unearned  Incomes" 


(£.a{ixvah\a,  Atasouri 

MISSOURI  BOOK  COMPANY 
1921 


70"^  t 


Copyright,  1921 

By  Missouri  Book  Company 

Published  January,  1921. 


■  1.5  '-'<^ 

CONTENTS  BY  SECTIONS 
I. 

EARNED  AND   UNEARNED   INCOMES,   INEQUALITY   AND 
TAXATION. 

§  1     The    Gonflict    of    Class    Interests    3 

§  2  The    Price    System    and    the    Specialization    of    Pro- 
ducers      8 

§  3  Earned  and  Unearned  Incomes — Wages  and  Profits  15 

§  4     Earned   and    Unearned    Incomes — Interest 19 

nD         §  5     Earned  aand  Unearned   Incomes — Land   Rent 24 

^         §  6     Inequality  of  Earned  Incomes 41 

^         §  7     Recapitulation    46 

II. 
THE  RENT  OF  LAND  AND  ITS  TAXATION. 

§  1     Land  Rent  as  a  Marginal  Product  of  Land 51 

^       §  2     Land  Rent  versus  Capital  Interest 54 

'  ^       §  3     Land  Rent  as  an  Unearned  Income 56 

^^         §  4     Improvements  by  Special  Assessments  and  the  Right 

of  Landowners  to  a  Rental  Return 60 

§  5     Other  Services  of  City  Landowners 63 

§  6     The   Increment   of   Land   Values   in   Relation   to   the 

Settlement  of  the  American  West   67 

§  7     The   Bearing  of  the   Contention   that   there   may    be 

Other  L^nearned  Incomes  Not  Especially  Associated 

with   Land   76 

§  8     The  Taxation  of  Future  Increments  of  Value 81 

§  9     Land-Value  Taxation  in   Relation  to  the  Theory  of 

Vested  Rights 84 

§  10  The  Ability  Theory  of  Taxation 93 

§  11  The  Taxation  of  "Excess  Profits"  versus  the  Taxa-  , 

tion  of  Land  Rent |06 

§  12  The  Taxation   of   Inheritances   98 

§  13  Some   Probable    Effects   of    Making   Land    Rent    the 

Chief  Source  of  Public  Revenues 100 

§  14  Summary   and   Conclusion   110 

(v) 


V 


■•^ 


vi  Contents  by  Sections 


APPENDIX. 

§  1  Suggestions  for  Legal  Enactment  or  Constitutional 
Amendment,  Especially  in  States  Having  the  Initia- 
tive and  Referendum 117 

§  2     Reasons   for  Proposed   Program   119 


THE  TAXATION 

OF 

UNEARNED  INCOMES 


Whence  shall  come  the  new  barbarians?  Go  through  the  squalid 
quarters  of  great  cities  and  you  may  see,  even  now,  their  gathering 
hordes.     .     .    . 

It  is  the  delusion  that  precedes  destruction  which  sees  in  the 
popular  unrest  with  which  the  civilized  world  is  now  feverishly 
pulsing,  only  the  passing  effect  of  ephemeral  causes.  Between  dem- 
ocratic institutions  and  the  aristocratic  adjustments  of  society  there 
is  an  irreconcilable  conflict.  Here  in  America,  as  there  in  Europe, 
it  can  be  seen  arising. 

Henry  George 
In  Progress  and  Poverty    (1879). 

It  is,  then,  for  some  one  to  construct  an  economic  science  adapted 
not  only  to  the  requirements  of  the  facts  but  to  the  need  of  their 
amelioration.  To  this  end  Economics  must  cease  to  be  a  system 
of  apologetics,  the  creed  of  the  reactionary,  a  defense  of  privilege, 
a  social  soothing  sirup,  a  smug  pronouncement  of  the  righteousness 
of  whatever  is — with  the  still  more  disastrous  corollary  of  the  un- 
righteousness of  whatever  is  not.     .     .     . 

When,  in  short,  we  have  changed  our  calling  from  the  painting 
of  Utopias  and  the  capitalizing  of  dreams,  and  have,  as  scientists, 
brought  ourselves  somehow  into  touch  with  fact,  the  prosperous 
may  no  longer  deride  us  or  the  disinherited  curse.  There  will 
need  be  no  laughing  then  anywhere,  and  if  there  be  cursing,  it  will 
have  changed  its  source. 

H.  J.  Davenport  of  Cornell  University 
In   The  Economics  of  Enterprise. 

(2) 


THE  TAXATIO?^  OF  UNEARNED 
INCOMES 

I 

EARNED     AND     UNEARNED     INCOMES,     IN- 
EQUALITY AND  TAXATION 


§  1 
The  Conflict  of  Class  Interests 

The  task  confronting  us  through  these  essays  is  to 
discover  whether  taxation  can  advantageously  be  used  as 
a  chief  tool  in  the  attainment  and  perpetuation  of  eco- 
nomic democracy,  and,  if  so,  what  system  of  taxation  is 
best  for  the  end  in  view.  Such  an  inquiry  as  is  here 
proposed,  may  well  involve,  as  a  first  step,  a  consideration 
of  the  nature  of  the  economic  system  in  and  through 
which  the  people  of  the  modern  world  carry  on  their 
struggle  for  the  means  of  existence.  For  unless  we  sup- 
pose this  system  to  be  the  best  possible,  it  ought  clearly 
to  be  either  modified  in  greater  or  less  degree  or  super- 
seded. And  whether  the  former  or  the  latter  change  can 
be  most  effectively  brought  about  or  can  be  brought  about 
at  all,  by  taxation,  as  well  as  whether  either  sort  of 
change  ought  to  be  brought  about  by  any  method,  can 
hardly  be  intelligently  decided  without  an  understanding 
of  the  fundamental  nature  of  the  system  of  which  the 
modification  or  supersession  is  contemplated. 

It  is  the  failure  clearly  to  comprehend  the  nature  of 
the  faults  of  the  existing  economic  system  which  has,  in 
large  part,  made  protest  and  even  revolt  ordinarily  so  fu- 
tile in  really  improving  the  conditions  of  life  for  the  com- 
mon man  to  the  extent  that  might  else  be  possible.    Pro- 

(3) 


4  Thk  Taxation  oif  Unearned  Incomes 

testant  or  revolutionary  groups  have  to  meet,  always,  the 
more  or  less  solid  opposition  of  the  groups  v^hose  inter- 
ests are  threatened  by  change  and  who  know  well  how 
to  protect  these  interests.  Individual  members  of  the 
conservative  groups  may  be  liberal-minded  enough  to 
favor  reforms  of  a  palliative  sort,  especially  as  many 
of  these  reforms  seem  likely  to  cost  them  nothing.  But 
few  members  of  the  conservative,  property-owning  class 
seem  able  to  contemplate  without  a  sense  of  shock  or  a 
feeling  of  indignation  any  proposal  seriously  to  disturb 
in  its  fundamentals  that  order  or  system  of  things  (the 
existing  system  of  private  property)  in  the  meshes  of 
which  they  have  been  bred  and  to  which  they  seem 
mainly  to  owe  their  material  well-being.  To  the  support 
of  that  system  in  general,  they  will  usually  rally.  We 
need  not  suppose  that  they  understand  it  in  the  sense  of 
being  able  to  contemplate  philosophically  its  faults  and  its 
virtues.  But  they  are  not  devoid  of  an  understanding  of 
how  it  works  to  maintain  them  and  of  how  to  make  the 
most,  in  argument,  of  certain  of  its  apparent  advantages. 
Reputable  economists  in  plenty  are  at  hand  to  support 
them  and  to  make  plausible  by  manifold  arguments  of 
ingenious  intricacy  the  claim  that  the  present  scheme 
of  things  is  good  for  the  masses  and  that,  anyway,  the 
views  of  those  who  attack  it  are  associated  with  this  or 
that  "now  generally  discredited"  doctrine  and  so  "fall  to 
the  ground"  and  "need  not  be  further  considered."  Young 
economists  not  infrequently  get  the  impression  from  their 
teachers  that  certain  views  are  commonly  rejected  by 
reputable  members  of  the  craft,  and  deem  it  not  worth 
while  to  investigate  them.  Subconsciously  they  come  to 
feel  that  these  views  would  be  likely  to  put  them  "out- 
side the  pale."    For  it  is  not  alone  through  inducing  the 


Tilt  Conflict  of  Class  Interests  5 

fear  of  loss  of  teaching  positions  (although  this  is  a  suffi- 
ciently common  means)  that  the  defenders  of  the  exist- 
ing regime  control  the  teaching  of  economic  principles 
and  problems. 

A  task  more  difficult  than  that  of  the  defenders  of  the 
present  system  confronts  those  iconoclastic  dissentients 
who  must,  to  be  successful,  get  another  system  put  in  its 
place.  These  dissentients  have  to  rally  the  elements  of 
discontent,  of  which,  presumably,  they  are  a  part,  to  the 
support  of  a  more  or  less  definite  program.  But  these 
elements  of  discontent  are  in  large  part  composed  of 
the  relatively  untrained  masses ;  hence  they  are  even  less 
likely  than  the  sufficiently  ignorant  propertied  classes  to 
understand  the  innner  nature  of  those  arrangements 
which  most  of  the  propertied  classes  defend  and  which 
it  appears  to  be  the  interest  of  the  masses  to  attack ;  and 
they  can  not  be  expected  to  have  a  very  intelligent  com- 
prehension of  the  kinds  of  change  needed  or  of  the  type 
of  system  which  may  best  be  substituted  for  the  one  we 
have.  The  protesting  masses  are  likely  to  be  attracted 
by  something  which  sounds  radical,  which  appears  to  up- 
root the  whole  present  scheme  of  things  but  which,  in 
fact,  can  not  be  made  to  work  successfully  in  the  existing 
state  of  human  nature.  They  are  too  likely  to  be  the  prey 
of  the  demagogue  or  the  fanatic.  With  a  sense  of  having 
been  unjustly  ground  down  by  an  economic  system  which 
has  made  others  prosperous,  they  are  likely  to  favor  abso- 
lute equality  of  incomes,  regardless  of  differences  in  ef- 
ficiency, or  to  follow  a  Marxian  philosophy  and  wish  to 
terminate  all  incomes  from  property  just  because  these  are 
not  labor  incomes.  If  the  propertyless  masses  succeed 
in  acquiring  temporary  control  through  revolution,  they 
are  likely  to  blunder  from  one  radical  step  to  another 


6  Thk  Taxation  of  Unearned  Incomes 

without  adequate  regard  to  those  elements  of  human  na- 
ture which  make  some  things  workable  and  others  not, 
until  the  general  turmoil  and  poverty  and  disorganization 
discredit  them  far  enough  to  put  their  deposed  masters 
back  into  the  economic  saddle. 

Again,  oftentimes  a  group  of  the  propertied  classes  is 
enabled  to  use  the  ignorance  and  discontent  of  the  prop- 
ertyless  as  a  means  of  further  lining  their  own  pockets 
even  at  the  expense,  partially,  of  the  rest  of  the  proper- 
tied classes,  as  well  as  at  the  expense  of  the  masses. 
Thus,  the  tariff  protected  interests  of  a  country,  through 
their  organizations  and  organs,  make  it  appear  to  mil- 
lions of  workingmen  that  free  traders  are  aristocratic  en- 
emies who  would  take  the  bread  from  their  mouths  to 
benefit  foreigners  and  that  a  high  tariff  system  is  a  neces- 
sary means  of  providing  workingmen  with  jobs.  Or 
those  property  owners  who  are  in  debt  and  who  can  gain 
at  the  expense  of  other  property  owners  (their  creditors) 
by  a  depreciation  of  the  monetary  standard,  may  some- 
times succeed  in  rallying  to  their  support  millions  of  wage 
earners  to  whom  such  depreciation  may  mean,  chiefly, 
increased  cost  of  living  with  no  immediate  corresponding 
rise  of  wages. 

It  is  not  only  the  propertyless  masses  who  can  be  thus 
put  into  a  false  position.  Class  prejudice  sometimes 
makes  groups  of  the  propertied  classes,  whose  interests, 
in  a  specific  reform,  are  the  same  as  the  interests  of  the 
masses,  nevertheless  oppose  such  a  reform.  And  so,  in 
the  case  of  a  protest  against  various  abuses  in  the  sys- 
tem of  property,  which,  if  effective,  would  limit  mainly 
the  incomes  of  the  wealthy  few,  these  few  are  able  to  lure 
to  their  support  thousands  of  small  property  owners  who 
might  even  stand  to  gain  by  the  proposed  change,  but 


The  Conflict  of  Class  Interests  7 

whose  prejudices  are  those  of  the  larger  owners  of  prop- 
erty and  who  are  easily  roused  to  a  belligerent  spirit  by 
anything  which  can  be  made  to  appear  to  them  as  a  threat 
against  a  system  of  things  which  they  have  learned  to 
regard  as  sacred. 

Hence,  many  of  the  great  mass  movements  which 
seem  to  be  democratic  movements,  lose  themselves  in  fal- 
lacies and  confusions  and  never  even  temporarily  gain 
their  objectives  or,  if  their  objectives  are  gained,  tempo- 
rarily, become  soon  discredited  and  fall  back  out  of 
the  rays  of  power  and  into  obscurity.  Real  democracy  is, 
therefore,  to  the  aspiring  masses,  as  is  the  mirage  to  the 
worn  traveller  in  the  desert — a  hope,  whose  realization 
appears  perpetually  to  recede.  Real  democracy,  in  the 
circumstances  of  class  interest  and  class  prejudice,  must 
wait  upon  some  development  of  intelligent  understanding 
of  the  economic  system  we  now  have  and  of  the  economic 
forces  at  work  in  that  system,  on  the  part  of  those  who 
are  its  victims.  For,  so  long  as  the  victims  of  the  existing 
economic  system  do  not  understand  the  faults  of  the 
system  against  which  they  protest,  well  enough,  spe- 
cifically enough,  and  discriminatingly  enough  to  make 
workable  reforms,  so  long  as  they  are  intellectually  incap- 
able of  doing  aught  but  lumping  together  for.  elimination 
unlike  types  of  incomes,  and  so  long  as  their  revolts  are 
likely  to  be  guided  by  a  short-sighted  selfishness,  to  be 
directed  by  demagogues,  fanatics  and  fools,  and  to  result 
in  a  turbulence  and  economic  breakdown  which  brings 
poverty  even  to  themselves  and  discredit  to  their  move- 
ment, worth-while  reform  is  hardly  to  be  expected  or 
hoped  for.  Aristocratic  economic  relations  must  prob- 
ably continue,  even  if  they  coexist  incongruously  with 
democratic  political  institutions.       Indeed,  the  exploited 


8  The  Taxation  of'  Unearned  Incomes 

masses  are  ordinarily  in  large  part  the  dupes  of  the  privi- 
leged interests  as  well  as  of  their  own  ignorance,  and 
support,  through  their  own  prejudices  and  their  own 
votes,  those  very  economic  policies  by  which  they  are  laid 
under  tribute. 

§2 

The  Price  System  and  the  Specialisation  of  Producers  ^ 

We  have  now  to  analyze  the  existing  economic  system 
so  as  to  see  by  what  processes  it  works  and  to  what  effect. 
This  system  is  sometimes  called  the  price  system  (a  term 
which  would  doubtless  continue  to  fit  even  if  considera- 
ble changes  were  made  in  economic  arrangements)  pre- 
sumably because  within  its  sway  almost  everything  is  the 
subject  of  purchase  and  sale  at  a  price.  Not  only  food, 
clothing,  furniture,  etc.,  and  buildings  and  lands,  but  labor 
services,  the  use  of  land,  the  use  for  fixed  or  indetermin- 
ate periods  of  sums  of  capital,  are  commonly  bought 
and  sold.  Prices  are  the  inducements  by  which  men  are 
persuaded  to  dispose  of  goods,  to  lend,  and  to  produce 
goods  for  disposal.  Money  is  an  intermediary  in  the  ex- 
change of  any  kind  of  goods  for  any  other  kind.  We 
produce  and  sell  one  or  some  things  in  order  that  we 
may  buy  other  things. 

The  price  system,  whether  as  we  know  it  or  as  some 
variant  of  its  present  form,  is  a  system  which  leaves 
those  within  it  largely  free  to  engage  in  such  occupations 
and  produce  such  goods  as  they  choose.    They  may,  in- 

1  Cf.  the  Author's  book  on  The  Theory  of  Earned  and  Unearned 
Incomes,  Columbia,  Mo.  (The  Missouri  Book  Co.).  1918,  Chs. 
I  and  II. 


The  Price  System  9 

deed,  be  often  subject  to  the  compulsion  of  circumstances 
but  they  are  not  subject  to  any  other  compulsion.  Coer- 
cive systems  of  industry  are  not  unknown  to  historians 
and  to  dreamers  of  Utopias.  Slavery  was,  and  is,  coer- 
cive. Feudalism,  with  its  accompanying  serfdom,  was 
coercive  to  the  serf.  The  caste  system  of  India  is  coer- 
cive. And  any  variety  of  socialism  which,  in  the  desire  of 
its  apostles  to  avoid  the  alleged  evils  of  competition, 
should  place  men  in  their  jobs,  would  be  coercive.  So- 
cial reformers  must,  in  fact,  make  their  choice  between 
some  form  of  voluntary  selection  of  occupations,  which 
inevitably  means  competition  for  the  apparently  prefer- 
able places,  or  coercion.    There  is  no  other  possibility. 

It  is  not  difficult  to  see  that  a  voluntary  system  must 
be  in  some  degree  a  competitive  system.  If,  in  a  system 
which  allows  choice  of  occupations,  one  line  of  industry 
pays  better,  all  things  considered,  than  another  line,  those 
persons  engaged  in  the  second  line  are  at  liberty  to  enter 
the  first.  But  to  enter  it  and  sell  their  product  they  have 
to  bid  down  its  price,  i.  e.,  compete.  They  then  become 
buyers  of  what  they  previously  produced  and  to  get  this 
they  may  have  to  bid  up  its  price.  Even  a  socialistic 
government  which  should  direct  all  industry  must  either 
coerce  its  subjects  into  their  respective  lines  of  work  or 
must  so  apportion  the  rewards  in  different  lines  of  pro- 
duction as  to  make  voluntary  choice  yield  the  desired 
proportions  of  various  kinds  of  goods.  In  other  words, 
the  relative  amounts  of  potential  competitive  offering  of 
services  in  different  lines  of  production,  must  be  taken 
account  of.     Otherwise  the  system  would  break  down. 

Whether  such  a  scientific  proportioning  of  rewards  as 
would  be  necessary  for  the  successful  working  of  the 
scheme  of   individual  choice  of  occupations,   would  in 


10  The  Taxation  oe  Unearned  Incomes 

fact  probably  be  adopted  by  a  democratically  governed 
socialist  state,  or  whether  groups  of  the  citizens  of  such 
a  state  would  inevitably  drift  into  bargaining  and  log- 
rolling, directly  or  through  their  representatives,  for  un- 
fairly large  returns  at  each  others'  expense,  or  whether 
socialists  could  avoid  a  compulsory  centralized  direc- 
tion of  industry,  we  need  not  inquire.  Our  present  in- 
terest lies  primarily  in  understanding  the  nature  of  the 
existing  system.  In  this  system  men  engage  in  pro- 
ducing those  goods  which  they  severally  think  it  pays 
them  best  to  produce,  in  order  to  exchange  them,  through 
the  intermediation  of  money  or  bank  checks,  for  goods 
which  others  produce;  and  if  what  men  get  for  their 
production  seems  too  little  and  what  they  pay  for  the 
goods  of  their  desire  seems  too  much,  they  have  the  op- 
tion of  becoming  producers  of  the  latter  goods  of  which 
they  have  been  purchasers,  thus  tending,  by  their  com- 
petition, to  rearrange  the  relative  prices  of  these  various 
goods. 

The  fact  that  voluntary  choice  of  industry  tends  thus 
towards  rearrangement  of  relative  prices  has  led  to  the 
statement  that  competition  so  afifects  prices  of  goods  as 
to  make  the  returns  to  the  persons  in  any  one  industry 
substantially  equal  to  the  returns  to  the  persons  in  any 
other  industry.  Such  an  assertion  is  true  only  in  an 
extremely  general  and  indefinite  sense.  To  illustrate  the 
necessary  qualifications,  let  us  suppose  that  A  is  pro- 
ducing wheat  as  the  best  way  of  getting  a  living.  He 
might  instead  produce  beets  and  would  do  so  if  that 
would  pay  him  better.  But  in  view  of  his  individual 
likes  and  abilities  and  the  qualities  and  situation  of  his 
land,  he  can  make,  perhaps,  very  much  more  at  the  busi- 
ness of  wheat  raising  than  he  could  at  raising  beets.    He 


The  Price  System  11 

may  even,  if  efficient  enough,  be  able  to  make  more  money 
raising  wheat  than  anybody  else  can  make  producing 
beets.  Nevertheless  there  are  probably  some  persons 
whose  abilities  or  the  characteristics  of  whose  land,  or 
both,  are  such  as,  at  the  existing  ratio  of  the  price  of 
wheat  to  the  price  of  beets,  would  make  it  more  profit- 
able for  them  to  produce  beets,  and  still  others  who 
would  find  it  about  equally  profitable  to  produce  either. 
These  last  would  shift  easily  from  wheat  production  to 
the  production  of  beets  or  vice  versa,  according  as  the 
first  or  the  second  kind  of  produce  rose  in  price  in  rela- 
tion to  the  other.  Those  engaged  in  wheat  production 
will  not  necessarily  receive  returns  exactly  equal  to  those 
received  in  beet  production.  They  may  receive  either 
more  or  less  according  to  the  circumstances.  Thus,  if 
wheat  is  much  more  desired  than  beets  by  the  commun- 
ity in  general,  the  price  of  wheat  will  be  high  enough 
to  bring  into  wheat  production  thousands  of  persons  (and 
their  land  or  the  land  they  hire)  who  at  a  lower  price 
of  wheat  would  have  chosen  to  produce  beets.  Yet  there 
will  still  be  some  who,  because  of  their  special  aptitudes 
and  their  preferences  as  to  kinds  of  labor  or  because  of 
the  qualities  of  their  land,  will  continue  to  produce  beets. 
Their  returns  will  be  less  than  before.  The  returns  of 
wheat  raisers  will  be  greater.  But  the  new  condition, 
like  the  old,  will  be  one  of  equilibrium. 

Similarly,  an  increased  use  of  shoes  and  a  diminished 
desire  for  hats  would,  at  least  for  a  time,  increase  the 
remuneration  of  shoemakers  and  decrease  that  of  hat 
makers.  If  the  only  barrier  to  change  of  occupation  is 
the  difficulty  of  learning  a  new  trade,  wages  in  the  trade 
for  which  there  is  now  a  greater  demand  need  not  in- 
definitely remain  much  higher  than  in  the  other  trade  in 


12  The;  Taxation  of  Unearned  Incomes 

order  to  keep  more  workers  in  the  former.  But  if  the 
new  work  is  permanently  distasteful  to  many  of  those 
drawn  into  it  in  order  to  satisfy  the  demand,  then  the 
wages  paid  in  it  may  have  to  be  permanently  higher,  even 
if  the  work  involved  is  to  a  large  number  of  those  en- 
gaged in  it,  the  most  agreeable  work  they  can  find.  The 
persons  who  would  have  been  in  this  work,  even  at  the 
old  relation  of  prices,  are  therefore  fortunate.  They  en- 
joy surplus  wages  or  profits  above  what  would  have  been 
necessary  to  induce  them  to  go  into  the  work.  They 
may,  and  probably  will,  enjoy  larger  average  incomes 
than  the  persons  who  remain  in  the  other  line.  And  yet 
there  is  a  sense  in  which  it  can  be  said  that  incomes  in 
their  line  are  not  higher  than  in  the  other,  viz.,  that 
there  are  still,  in  the  other  line,  persons  who  find  it,  all 
things  considered,  preferable. 

Such  inequality — if  inequality  it  should  be  called — as 
results  from  the  conditions  above  discussed,  is  an  inevit- 
able concomitant  of  voluntary  choice  of  industries.  To 
make  incomes  equal,  under  such  circumstances,  or  to  re- 
duce the  incomes  of  those  in  the  favored  line  to  what 
we  might  consider  the  average  level  in  the  other  line, 
it  would  be  necessary  to  make  occupations  coercive. 
Whether  or  not  we  can  put  greater  burdens  on  those 
who  get  the  larger  incomes  than  on  those  who,  in  either 
line,  receive  smaller  incomes,  is  a  different  matter,  which 
we  need  not  now  discuss.  It  suffices,  for  the  present,  to 
point  out  that  public  policy  can  not  advantageously  be 
discriminatory  as  between  industries,  unless  the  indus- 
try discriminated  against  is  an  undesirable  one,  e.g.,  the 
manufacture  and  sale  of  harmful  drugs,  or  unless  it  is, 
or  partakes  somewhat  of  the  nature  of,  monopoly. 


The  Prici:  System  13 

There  are,  however,  cases  of  difference  between  oc- 
cupational incomes  which  ought,  in  the  opinion  of  many, 
to  be  in  some  way  corrected.  These  are  cases  from 
which  the  element  of  monopoly  seems  not  to  be  wholly 
absent.  Thus,  there  may  be  many  persons  in  a  given 
line  of  production,  not  because  the  pay  is  good  and  not 
because  the  work  is  pleasant  but  solely  because  those 
who  are  in  this  line  are  disqualified  by  lack  of  ability  or 
lack  of  training  for  engaging  in  other  lines  where  com- 
petition is  less  intense.  The  prices  of  the  material  goods 
or  the  services  they  turn  out  will  be  relatively  low  be- 
cause these  goods  or  services  are  relatively  plentiful,  yet 
the  labor  involved  may  be  difficult  and  unpleasant.  So 
far  as  the  explanation  for  the  small  per  capita  remunera- 
tion received,  is  to  be  found  in  the  lack,  by  many  or  most 
of  the  people  concerned,  of  the  innate  abiHty  necessary 
for  the  performance  of  other,  better  rewarded  tasks,  the 
difficulty  lies  in  there  being  a  relative  surplus  of  people 
who  lack  relatively  desirable  (in  view  of  contemporary 
human  needs  and  tastes)  physical  or  mental  character- 
istics. The  biologist  interested  in  eugenics  would  be 
likely  to  fear  that  partly  to  support  such  a  class  from 
the  surplus  earnings  of  citizens  whose  characteristics 
were  better  adapted  to  the  satisfaction  of  the  more  im- 
portant or  of  relatively  inadequately  satisfied  human 
wants,  might  involve  counter  selection,  an  undue  multi- 
plication of  the  unfit.  There  may  be,  indeed,  too  much 
counter  selection  as  it  is.  If  so,  that  is  an  added  reason 
for  not  adopting  a  social  policy  calculated  to  increase  it. 

But  human  beings  are  probably  not,  innately,  so  differ- 
ent in  ability  that  most  of  the  present  inequality  can  be 
thus  accounted  for.  There  are  doubtless  very  many  per- 
sons whose  natural  aptitudes  would  enable  them  to  un- 


14         The;  Taxation  oi^  Une;arne;d  Incomes 

dertake  better  paying  work  than  they  are  at  present  en- 
gaged in,  if  only  they  had  the  requisite  training.  Some- 
times early  disinclination  to  study  and  sometimes  the 
cost  of  education  have  been  the  obstacles  that  have  kept 
them  from  rising  out  of  the  ranks  of  common  labor.  If, 
indeed,  learning  can  be  secured  only  by  the  children 
whose  parents  have  large  incomes  and  if  large  labor 
incomes  can  only  be  secured  by  those  who  are  able  to 
get  considerable  training,  we  have  a  vicious  circle  of 
cause  and  effect.  Perhaps  this  is  one  of  the  reasons — 
though  the  need  for  intelligent  citizenship  and  leader- 
ship in  a  democracy  is  surely  another — why  it  is  gen- 
erally assumed  in  progressive  democratic  countries  that 
a  system  of  public  education  should  keep  educational  op- 
portunity at  least  within  the  possible  reach  of  nearly  all. 
Nevertheless,  there  are  probably  limits  to  the  burden 
which  the  public  ought  to  be  required  to  assume,  even 
for  the  spread  of  education.  For  one,  and  a  most  im- 
portant, explanation  of  unequal  wages  is  unequal  birth 
rates.  If  wage  receivers  who  are  unable  to  earn  much 
because  those  in  their  lines  are  too  many,  and  because 
the  goods  or  services  produced  in  these  lines  are 
therefore  too  plentiful,  were  to  limit  their  families,  each, 
to  the  number  they  could  comfortably  support,  their  ex- 
cess of  numbers,  even  if  few  among  them  worked  up 
into  a  "higher"  economic  class,  would,  in  a  few  genera- 
tions, cease  to  be  a  cause  of  low  remuneration.  Higher 
wages  in  such  a  group  would  result  from  smaller  num- 
bers in  it.  And  higher  wages,  together  with  smaller  fam- 
ilies, would  enable  the  members  of  the  group  individually 
and  even  without  public  assistance,  to  give  their  children 
better  training.  But  if  the  masses  of  people  will  not 
practice  birth  limitation,  while  certain  groups  do  prac- 


Earned  and  Unearned  Incomes — Wages        15 

tice  it  in  order  that  their  fewer  children  may  be  better 
reared  and  trained,  then  there  is  grave  doubt  whether  the 
latter  class  ought  to  be  heavily  taxed  in  order  that  the 
children  of  the  former  may  have  equal  opportunities. 
Continuous  increase  of  population,  since  natural  re- 
sources are  limited,  tends  towards  diminished  per  capita 
production.  Hence  a  policy  of  providing  for  the  train- 
ing of  the  children  of  those  who  multiply  rapidly,  by 
drafting  the  surplus  incomes  of  those  who  do  not,  though 
it  may  indeed  equalize  incomes,  is  almost  certain  to  equal- 
ize them  downward ;  while  the  spread  of  birth  limitation 
among  the  classes  which  suffer — while  others  gain — from 
their  surplus  of  numbers,  tends  to  equalize  upward. 


Earned  and  Unearned  Incomes — Wages  and  Profits 

In  the  previous  section  the  endeavor  was  made  to  ex- 
plain only  the  inequality  which  may  result  between  dif- 
ferent occupations  or  lines  of  production,  in  the  price 
system.  So  far  as  we  discussed  wages,  our  interest  lay 
in  the  relation  of  the  wages  of  unskilled  to  the  wages  of 
skilled  labor.  We  did  not  attempt  to  show  how  the 
interests  of  different  economic  classes,  e.  g.,  laborers  and 
capitalists,  in  any  one  line  of  production  are  related  to 
each  other.  The  persons  connected  with  the  production 
of  each  kind  of  wealth  or  service  are  divided  into  classes 
or  sub-groups  having  interests  more  or  less  diverse.  We 
shall  consider  these  sub-groups  as  three.  There  are  those 
who  perform  the  labor,  those  who  provide  the  capital 
and  those  who  own  the  land,  used  in  carrying  on  the 
production.  The  corresponding  incomes  are  wages,  in- 
terest, and  land  rent. 


16  The  Taxation  of  Unearned  Incomes 

The  wages  of  labor  are  received  for  labor  services. 
They  depend  on  demand  for  and  supply  of  labor  and, 
ultimately,  on  the  (marginal)  productivity  of  the  labor. 
If  the  services  of  a  workman  add  more  to  the  produc- 
tivity of  an  industry  than  he  receives  in  wages,  it  be- 
comes profitable  to  employ  him,  and  demand  for  his  serv- 
ices is  likely  to  result  in  increasing  these  wages.  (Though 
custom,  prejudice,  immobility  of  labor,  and  lack  of  means 
for  exact  measurement  of  the  amount  and  value  of  work 
done,  may  make  the  readjustment  slow  and  rough.)  If, 
on  the  other  hand,  a  man's  services  appear  to  be  of  less 
value  than  his  wages,  then  these  services  are  not  likely 
to  be  in  demand  unless  and  until  the  wages  fall.  Taking 
the  case  of  a  group  of  wage  earners  of  equal  ability,  we 
may  reasonably  suppose  that  any  establishment  which 
could  use  their  services  would  tend  to  employ  more  of 
them  at  a  lower  wage  than  at  a  higher  wage,  for  it  would 
tend  to  employ  them  up  to  such  a  point  that  the  gain 
from  hiring  more  was  zero.  And  wages  must  be  low 
enough  so  that  substantially  all  the  labor  force  of  a  com- 
munity (emigration  aside)  could  get  employment  among 
all  the  manufacturing,  mining,  farming  and  other  estab- 
lishments. Without  our  insisting,  however,  on  all  the 
technical  points  of  economic  theory,  it  should  be  clear 
that  wages  are  paid  for  services  rendered,  that  their 
amount  is  fixed  by  demand  and  supply,  and  that  demand 
and  supply  so  operate  as  to  make  wages  higher  when 
labor  productivity  is  large  than  when  it  is  small.  We 
have  already  seen  why  wages  may  be  higher  in  one  line 
than  in  another  in  connection  with  our  study  of  the  rela- 
tion of  the  prices  of  some  goods  to  prices  of  other  goods. 
It  should  be  clear,  also,  that  the  more  efficient  workers 


Earned  and  Unearned  Incomes — ^Wages        17 

in  any  given  line  will  be  able,  on  the  average,  to  command 
higher  wages  than  those  who  are  less  efficient. 

Among  incomes  from  labor  ought  to  be  included  those 
returns  to  the  owners  and  managers  of  industry,  above 
interest  on  their  capital  and  rent  on  their  land,  which 
economists  sometimes  call  profits.  These  are  the  rewards 
of  self -directed  labor,  as  contrasted  with  wages  the 
amount  of  which  is  more  or  less  contracted  for  in  ad- 
vance. Hence  they  are  even  more  sensitive  to  the  effi- 
ciency of  the  worker  at  his  job  than  are  ordinary  wages. 
But  they  are  certainly  none  the  less  the  rewards  of  ef- 
fort and  are  not  to  be  confused  with  the  income  which  the 
employer  gets  by  virtue  of  his  ownership  of  property. 

Incomes  from  labor  are  often  assumed  to  have  some 
special  justification  as  distinguished  from  incomes  from 
property.  Socialists,  for  example,  assert  that  labor  alone 
produces  value  and  argue  for  the  termination  of  all  in- 
comes from  property.  And  while  it  may  be  doubted 
whether  this  sect,  if  in  control  of  our  economic  life, 
would  be  very  tender  with  those  incomes  from  labor 
which  we  call  profits,  they  would,  if  consistent,  neces- 
sarily be  more  tender  with  those  incomes  than  with  in- 
terest or  rent. 

Whatever  may  be  true  of  most  labor  incomes,  it  is  cer- 
tain that  some  incomes  from  labor  are  unearned,  if  the 
test  be  the  giving  of  a  quid  pro  quo  to  those  from  whom, 
in  the  last  analysis,  the  incomes  in  question  are  drawn. 
When,  for  example,  a  group  of  men  successfully  form  a 
monopoly  in  order  to  raise  the  price  of  their  goods  or 
services,  to  the  public,  above  a  normal  competitive  re- 
turn, the  reasonable  presumption  is  that  this  excess  above 
a  competitive  return  is  unearned.  So,  also,  when,  though 
monopoly   is   not    formally   or    completely    established, 


18  The  Taxation  of  Unearned  Incomes 

methods  of  business  are  adopted  which  are  calculated  to 
eliminate  even  an  exceptionally  efficient  producer,  the 
additional  incomes  received  by  those  adopting  these 
methods  are  to  be  regarded  as  unearned.  So-called  un- 
fair competition  is  in  this  category.  Thus,  a  business 
concern  may,  as  the  National  Cash  Register  Company 
was  proved  in  court  to  have  done,  misrepresent  a  com- 
petitor's goods;  ^  it  may,  if  it  controls  the  major  part  of 
the  business  in  its  line,  so  that  most  dealers  will  feel 
obliged  to  handle  its  goods,  eliminate  smaller  even  though 
more  efficient  producers  by  ordering  dealers  not  to  sell 
the  latters'  goods  on  penalty  of  not  being  allowed  to  han- 
dle its  goods ;  or  such  a  concern  may  make  arrange- 
ments with  transportation  companies  to  discriminate  in 
its  favor  and  against  its  rivals,  in  the  matter  of  freight 
rates,  thus  again,  despite  the  possible  superior  merit  or 
greater  cheapness  of  the  latters'  goods,  eliminating  them 
from  the  market.  Income  secured  as  a  result  of  such 
(now,  in  the  United  States,  outlawed)  methods  of  com- 
petition, clearly  is  not  to  be  regarded  as  earned. 

But  the  case  is  different  with  the  owners  and  man- 
agers of  a  concern  which  increases  its  business  and  dis- 
places many  of  its  rivals  by  virtue  of  the  superior  quality 
or  cheapness  of  its  goods,  a  superiority  resulting  from 
more  intelligent  selection  or  use  of  machinery,  better 
adaptation  of  tasks  to  men,  better  organization  of  work, 
or  other  waste-saving  proficiency.  Business  and  income 
so  secured  are  an  index  of  superior  service  to  the  public 
and  are  not,  as  in  the  cases  previously  discussed,  a  badge 
of  dishonor. 

2  The  various  methods  of  unfair  competition  practiced  by  this 
company  are  described  in  Seager,  T/ie  Principles  of  Economics,  New 
York  (Holt),  1913,  pp.  493-499. 


Earni;d  and  Unearned  Incomes — Interest      19 

The  incomes  of  employees,  like  the  labor  incomes  of 
managing  employers,  may  also  be  either  earned  or  un- 
earned, according  as  those  from  whom  they  are  ulti- 
mately derived — usually  the  consuming  public — do  or  do 
not  receive  an  equivalent  in  goods  or  services. 

§4 
Earned  and  Unearned  Incomes — Interest  ^ 

Incomes  from  property  may  be  either  from  capital  or 
from  land.  We  shall  consider,  first,  those  from  capital. 
As  with  incomes  from  labor,  they  may  be  either  earned 
or  unearned.  This  assertion,  of  course,  runs  counter  to 
the  socialistic  view  that  interest  as  such  is  always  exploi- 
tation. According  to  the  doctrine  of  orthodox  socialism, 
labor  produces  all  value.  From  this  premise  it  is  argued 
that  those  who  perform  the  labor  should  get  the  entire 
product.  Since  they  do  not  get  the  entire  product  of 
industry,  the  present  economic  system  is  asserted  to  be 
one  of  robbery.  Of  course,  as  a  matter  of  sound  logic, 
it  is  impossible  thus  to  distinguish  between  labor  and  cap- 
ital. While  it  may  be  true  that  nothing  or  next  to  noth- 
ing can  be  produced  by  capital  without  labor,  it  is  likewise 
true  that  next  to  nothing  can  be  produced  by  labor  with- 
out capital.  Labor  without  buildings,  roads,  machinery 
and  tools  would,  indeed,  be  helpless  and  might  easily 
perish. 

So  much  the  socialist  would  perforce  admit,  but  he 
would  perhaps  reply  that,  although  labor  must  use  capi- 

^  In  The  Theory  of  Earned  and  Unearned  Incomes,  Chs.  Ill  and 
IV,  the  author  has  attempted  a  more  exhaustive  study  of  interest  on 
capital  than  is  here  presented. 


20  The  Taxation  of  Unearned  Incomes 

tal,  capital  is  but  the  child  of  labor,  that  capital  is  only 
an  intermediate  step  between  the  putting  forth  of  labor 
and  the  securing  of  the  full  product  of  labor.  This  reply, 
however,  hardly  gives  a  full  account  of  the  matter.  Capi- 
tal is  always  a  surplus  above  the  needs  of  present  con- 
sumption. Hence  its  creation  involves  not  only  labor 
but  also  a  refraining  from  the  present  consumption  of  the 
products  of  labor.  In  short,  the  creation  of  capital  in- 
volves abstinence,  or  waiting,  or  saving.  The  person 
who,  though  he  labors  never  so  efficiently,  consumes  in 
current  gratification  all  that  his  labor  produces  (or  an 
equivalent  in  other  goods  for  which  the  goods  he  has 
produced  are  exchanged),  adds  nothing  to  the  capital 
equipment  of  society.  The  only  persons  to  whom  society 
owes  anything  for  the  benefits  yielded  by  capital  are  those 
persons  through  whose  saving,  as  well  as  their  labor,  the 
capital  comes  into  existence.  And  if  an  increment  of  capi- 
tal adds  anything  to  the  annual  output  of  the  community's 
labor  force,  beyond  what  this  labor  force  would  pro- 
duce with  that  much  less  capital  equipment,  such  an 
added  annual  output  of  industry  is  certainly  made  pos- 
sible by  that  person  or  those  persons  whose  saving,  whose 
excess  of  production  over  consumption,  brought  the  cap- 
ital into  existence.  And,  further,  provided  the  person 
whose  production  and  saving  makes  possible  the  exist- 
ence of  the  capital,  gets,  as  interest  on  this  capital,  no 
more  than  the  use  of  the  capital  adds  to  the  production 
of  goods  and  services  which  would  have  been  possible 
without  it,  he  cannot  be  said  to  rob  anyone,  since  no  one 
is  any  worse  off  than  if  the  accumulator  of  the  capital 
had  never  brought  it  into  existence.  If  the  socialist 
would  say,  frankly,  that,  though  the  accumulator  of  cap- 
ital makes  possible  an  addition  to  the  annual  product  of 


Earned  and  Unearned  Incomes — Interest      21 

industry  above  what  all  the  labor  available  and  all  pre- 
viously existing  capital  would  otherwise  produce,  and 
is  in  that  sense  the  real  producer  of  this  additional  annual 
product,  nevertheless  not  he  but  the  other  members  of 
society  ought  to  get  this  additional  product,  ought  to 
exploit  the  actual  producer  of  it,  we  might  disagree 
with  the  socialist  but  we  could  at  least  understand  him. 
But  to  say  that  labor  alone  produces  all  wealth  is  eco- 
nomic nonsense.  And  in  saying  this,  in  the  sense  in 
which  he  does  say  it,  and  basing  upon  it  serious  conclu- 
sions regarding  public  policy,  the  self-styled  scientific  so- 
cialist reveals  his  system  as  a  pseudo-science.  In  this 
regard,  nearly  all  types  of  socialism  seem  to  be  on  com- 
mon ground.  Interest  appears  to  be  anathema  to  socialists 
of  all  or  nearly  all  schools,  not  merely  to  those  of  pro- 
fessed Marxian  leanings.  And  guild  socialism,  the  latest 
fad  of  many  socialist  theorizers,  is  no  exception. 

Nor  can  the  socialist  easily  distinguish  between  wages 
and  interest  on  other  grounds,  so  as  to  justify  one  and 
condemn  the  other.  He  cannot,  for  instance,  make  an 
ethical  distinction  by  asserting  that  wages  are  a  reward 
for  sacrifice  and  interest  a  payment  not  earned  by  sacri- 
fice. To  be  sure,  saving  may  be,  for  many,  a  pleasure 
which  they  would  indulge  were  no  interest  paid.  Partic- 
ularly may  persons  whose  incomes  are  large,  save  con- 
siderable amounts  for  the  benefit  of  their  children  with- 
out being  conscious  of  appreciable  present  deprivation. 
But  the  labor  for  which  wages  are  paid  may  also  be,  in 
some  cases,  not  only  not  a  sacrifice,  but  a  continuous 
source  of  pleasure.  There  seems  to  be  a  notion,  among 
socialists  and  some  others,  that  the  reason  why  wages 
are  paid  and,  also,  the  reason  why  wages  should  be  paid, 
is  because  labor  is  unpleasant.    It  is  true  that  the  greater 


22  The  Taxation  of  Unearned  Incomes 

unpleasantness  of  one  kind  of  work  than  of  another, 
when  the  latter  does  not  require  a  more  rare  type  of 
ability  than  the  former,  gives  rise  to  higher  pay  for  the 
former.  But  if  all  work  were  a  delight — as  some  work 
is  to  some  workers — those  who  did  the  work  would  not 
on  that  account  consent  to  forego  their  pay.  Nor  would 
any  employing  property  owner  be  able  to  avoid  paying 
wages  for  work  done,  so  long  as  labor  was  productive, 
since  he  would  have  to  reckon  with  the  competition  of 
other  employers  to  whom  productive  labor  would  seem 
worth  hiring.  It  is  because  labor  produces  something 
that  wages  are  paid  and  not  because  labor  is  unpleas- 
ant. Similarly,  it  is  because  capital  and,  therefore,  in 
effect,  saving,  produces  with  labor  more  than  labor  alone 
could  produce,  that  interest  is  paid  for  the  use  of  capital 
in  industry.  The  time  has  gone  by  when  sacrifice  as 
such  can  be  regarded  as  a  virtue  apart  from  any  bene- 
ficial consequences  it  may  produce,  or  can  be  regarded  as 
entitled,  in  itself,  to  any  reward. 

It  does  not  follow  that  all  interest  is  earned  any  more 
than  that  all  wages  are  earned.  Capital,  as  well  as  labor, 
may  be  so  used  as  to  produce  a  disservice  rather  than  a 
service  to  the  general  public.  Capital  may  be  invested 
in  the  means  of  corruption,  in  building  up  political  influ- 
ence through  which  the  public  is  exploited,  in  the  tools 
and  machinery  of  noxious  drug  making,  in  the  plant  of 
a  periodical  devoted  to  misrepresentation.  If  so,  the  in- 
terest received  cannot  be  said  to  be  earned  in  the  sense 
in  which  we  are  using  the  term.  So  far  as  interest  on 
capital  and  remuneration  of  labor  are  received  by  per- 
sons who  do  not  give  for  them  equivalent  service  to 
those  from  whom  such  interest  or  wages  are  in  the  last 
analysis  drawn,  it  would  seem  that  the  receipt  of  such 


Earned  and  Unearned  Incomes — Interest      23 

interest  and  wages  by  them  should  be  prevented,  if  pre- 
vention is  in  any  way  possible.  A  democracy  can  hardly 
afford  to  have  a  privileged  class  deriving  large  incomes 
for  disservices  or  even  for  negative  services. 

Under  the  plan  of  things  laid  down  by  orthodox  so- 
cialists no  individual,  as  such,  would  be  allowed  to  own 
capital  to  any  appreciable  extent.  Certainly  no  one 
would  be  allowed  to  own  any  of  the  machinery  of  pro- 
duction. Hence,  no  individual  could  have  any  motive  in 
accumulating  capital  unless  that  motive  were  the  common 
good  and  he  would  not  actually  accumulate  it  unless  the 
influence  of  such  a  motive  overweighed  the  personal  and 
family  sacrifice  involved.  Capital  would,  therefore,  un- 
der such  a  regime,  presumably  have  to  be  accumulated 
and  maintained  by  the  state.  This  would  mean,  in  a  dem- 
ocratic community,  that  saving  would  have  to  be  sup- 
ported, or  at  least  tacitly  agreed  to,  by  a  majority  of  cit- 
izens, in  order  that  any  saving  should  be  done,  while 
under  the  present  system  capital  is  accumulated  even  if 
only  one  person  out  of  ten  or  one  out  of  a  thousand  is 
willing  to  make  the  incident  present  sacrifice. 

Again,  such  state  saving  as  the  socialist  would  resort 
to  is,  for  the  individual  who  is  not  in  the  majority, 
compulsory  saving.  He  must  accept,  in  present  con- 
sumable goods,  only  that  part  of  the  wages  he  would 
otherwise  get,  which  the  majority  permits,  in  order  that 
the  remainder  should  be  used  for  the  maintenance  or  the 
increase  of  capital.  Or,  on  the  other  hand,  in  case  the 
majority  decides  against  adequate  saving,  then  the  indi- 
vidual who  would  have  saved  must  see  the  community's 
productive  equipment  depreciate  and  the  prospect  of  a 
good  living  for  his  children  progressively  decline,  without 
being  able  to  apply  any  remedy. 


24         The:  Taxation  of  Unearned  Incomes 

It  is  not  the  intention  to  argue  that  no  form  of  socialism 
or  near-sociaHsm  could  possibly  be  adopted  which  would 
work  differently.  Thus,  the  state  might  operate  all  in- 
dustry, but  secure  its  capital  from  the  voluntary  saving 
of  its  employees,  and  pay  these  employees  interest  based 
on  the  per  cent,  advantage  *  of  having  their  capital.  In- 
deed, voluntary  choice  whether  to  save  or  not,  coupled 
with  payment  of  interest  in  accordance  with  the  utility 
to  the  community  of  the  saving,  would  seem  to  be  con- 
sistent with  voluntary  choice  whether  to  work  or  not 
and  in  what  occupation  to  work,  coupled  with  payment 
of  wages  in  accordance  with  the  utility  to  the  community 
of  the  work  done.  Compulsion  as  to  saving  would  appear 
to  comport  better  with  compulsory  labor  and  compulsory 
assignment  to  occupations. 

Should  any  sort  of  quasi-socialized  state  be  at  all  feas- 
ible on  the  voluntary  principle,  the  main  question  of  ex- 
pediency would  perhaps  be  as  to  the  efficiency  of  such  a 
state  in  serving  its  citizens  economically,  in  comparison 
with  the  efficiency  of  independent  and  more  or  less  com- 
peting business  units.  But  objection  to  the  private  re- 
ceipt of  interest  on  capital  is  so  fundamental  in  the  doc- 
trine of  socialism — including  guild  socialism — that  few 
socialists  are  likely  to  urge  any  system  which  permits  it. 


§  5 
Earned  and  Unearned  Incomes — Land  Rent 

In  beginning  a  consideration  of  land  rent  we  may  ad- 
vantageously call  attention  to  a  fundamental  distinction, 

*  Marginal  advantage,  the  economist  would  say. 


Earned  and  Unearned  Incomes — Land  Rent    25 

too  often  overlooked,  between  rent  and  interest.  It  is 
sometimes  said  that  the  rent  of  land  is  no  less  interest 
than  the  return  on  other  capital,  since  the  return  on  land 
can  be  viewed  as  a  given  percentage  on  a  given  valuation, 
while,  on  the  other  hand,  the  interest  on  other  capital 
can  be  viewed  as  an  absolute  amount  in  dollars  per  ma- 
chine or  factory,  just  as  land  rent  is  viewed  as  so  many 
dollars  per  building  lot  or  per  acre  a  year.  But  more 
fundamentally  there  is  a  difference,  despite  the  superficial 
resemblance,  between  situation  rent  and  capital  interest. 
The  return  on  land  should  be  looked  at  as  an  absolute 
amount  measured  and  determined  by  the  surplus  above 
interest  and  wages  (the  surplus  over  production  on  the 
extensive  or  intensive  margin),  which  can  be  produced 
by  industry  on  the  land  in  question.  It  is  not  determined 
by  the  value  of  the  land.  Neither  has  the  value  of  land 
as  such,  i.  e.,  its  situation  value  apart  from  improve- 
ments, any  relation  to  any  cost  of  production,  since  the 
land  was  not  humanly  produced.  On  the  contrary,  the 
value  of  the  land  can  be  arrived  at  only  by  discounting 
its  expected  future  rents  or  returns  at  some  previously 
found  rate  of  interest.  Thus,  a  piece  of  land  which 
would  yield  $5,000  per  year  net  rent  (above  taxes,  wages 
of  labor  employed,  interest  on  the  capital  invested  in 
buildings  and  other  improvements,  and  insurance)  would 
be  worth,  if  interest  were  5  per  cent.,  $100,000.  Were 
the  current  rate  10  per  cent.,  such  a  piece  of  land  would 
be  worth  but  $50,000. 

With  equipment  of  the  producible  and  reproducible 
kind,  however,  the  relation  between  capital  and  income 
value  is  not  the  simple  one  above  outlined.  The  value 
of  such  capital,  though  not  unaffected  by  the  value  of  its 
expected  services,  is  very  directly  related  to  the  cost  of 


26  The  Taxation  op  Unearned  Incomes 

its  production.  Buildings  of  a  type  costing  $5,000  each 
will  hardly  be  put  up  to  sell  for  much  less,  as  a  rule,  by 
the  builders.  Nor,  so  long  as  the  alternative  is  open  to 
him  of  supervising  the  construction  of  a  similar  building, 
will  a  possible  buyer  care  to  pay  a  great  deal  more.  The 
value  of  a  building  is  determined  then,  in  large  part,  by 
the  expenses,  such  as  wages,  of  producing  the  materials 
and  of  puting  it  up ;  and  these  wages  are  determined,  in 
the  last  analysis,  by  the  existence  of  alternative  lines  of 
activity  open  to  the  wage-earners,  while  the  other  costs 
are  determined  by  the  alternative  uses  to  which  the  land 
or  capital  which  must  be  used  in  producing  the  mate- 
rials might  be  put. 

Since  the  value  of  produced  and  reproducible  capital 
is  thus  in  large  part  fixed  directly  by  its  cost  of  pro- 
duction, the  assertion  that  interest  is  in  large  part  deter- 
mined by  the  rate  of  productivity  of  capital  does  not  in- 
volve reasoning  in  a  circle.  Interest  is  5  per  cent,  be- 
cause, for  one  and  perhaps  the  most  important  reason, 
capital  worth  $10,000  will  produce  an  annual  net  income 
of  $500.  It  therefore  appears,  to  sum  up  our  conclu- 
sions thus  far,  that  the  value  of  produced  capital  depends 
in  a  considerable  degree  on  cost  of  production,  that  the 
ratio  between  the  value  of  capital  and  its  income  is  an 
important  factor  in  determining  the  general  long-run  rate 
of  interest,  and  that  this  rate  of  interest  is  an  essential 
element  in  the  valuation  of  land. 

It  is  but  a  short  step  to  the  conclusion  that  the  ac- 
«_umulators  of  produced  capital  may — and  in  many  cases 
doubtless  do — add  to  the  value  of  the  annual  aggre- 
gate income  of  society  as  much  as  they  take  out  of  this 
income  in  interest ;  while  the  owners  of  land,  as  such, 
contribute  no  service  in  return  for  their  income.    Where- 


Earned  and  Unearned  Incomes — Land  Rent    27 

as,  in  the  case  of  produced  capital,  the  pubhc  (except  in 
certain  cases,  numerous  enough  no  doubt,  where  the 
capital  is  wastefully  or  injuriously  used)  pays  the  owner 
for  a  service  which,  without  his  saving  (or  the  saving 
of  someone  whose  right  tg  payment  has  been  transferred 
to  him)  would  not  have  been  enjoyed;  in  the  case  of 
land  the  payment  is  made  for  a  benefit  which  is  depend- 
ent on  no  individual's  saving  or  effort  and  a  benefit  for 
which,  therefore,  no  individual  is  responsible.  In  the  one 
case  the  community  pays  for  a  service  which  is  actually 
rendered  to  it.  In  the  other  case  it  pays  people  who  have, 
in  the  capacity  in  which  they  are  paid,  rendered  no 
service.^ 

To  avoid  any  possible  misunderstanding,  let  it  be  em- 
phasized that  land  rent  as  here  defined  does  not  mean 
merely  the  sum  paid  by  a  tenant  to  an  owner,  for  the  use 
of  the  land,  but  equally  the  amount  received  by  the  per- 
son who  himself  uses  his  own  land,  in  excess  of  wages 
for  his  labor  and  interest  on  his  capital.  This  rent 
comes  to  him  in  money  when  he  sells  the  goods  or  serv- 
ices which  the  land  produces.  He  is  paid,  thus,  by  oth- 
ers, for  benefits  which  not  he  but  the  land  renders.  The 
community,  in  buying  from  him,  pays  him  for  more  than 
the  service  he  and  his  capital  render  them. 

The  nature  of  land  rent  and  of  the  influences  that 

5  Professor  Edwin  R.  A.  Seligman,  whose  views  regarding  the 
ideal  sort  of  taxation  appear  to  be  fundamentally  antagonistic  to 
those  presented  in  this  book,  has,  in  the  opinion  of  the  present  writer, 
signally  failed  to  grasp  the  distinction  set  forth  above.  See  his 
Principles  of  Economics,  sixth  edition,  New  York  (Longmans), 
1914,  paragraph  beginning  at  bottom  of  page  391.  For  a  further 
elaboration  of  this  and  related  distinctions,  see  the  succeeding  essay  on 
The  Rent  of  Land  and  Its  Taxation,  S  7. 


28  The  Taxation  of  Unearned  Incomes 

bring  it  into  existence  can  not,  perhaps,  be  better  set 
forth  than  in  the  following  passage  from  Henry  George's 
Progress  and  Poverty :  ^ 

"Here,  let  us  imagine,  is  an  unbounded  savannah 
stretching  off  in  unbroken  sameness  of  grass  and  flower, 
tree  and  rill,  till  the  traveler  tires  of  the  monotony. 
Along  comes  the  wagon  of  the  first  immigrant.  Where  to 
settle  he  cannot  tell — every  acre  seems  as  good  as  every 
other  acre.  As  to  wood,  as  to  water,  as  to  fertility,  as  to 
situation,  there  is  absolutely  no  choice,  and  he  is  per- 
plexed by  the  embarrassment  of  richness.  Tired  out 
with  the  search  for  one  place  that  is  better  than  another, 
he  stops — somewhere,  anywhere — and  starts  to  make 
himself  a  home.  The  soil  is  virgin  and  rich,  game  is 
abundant,  the  streams  flash  with  the  finest  trout.  Na- 
ture is  at  her  very  best.  He  has  what,  were  he  in  a  pop- 
ulous district,  would  make  him  rich;  but  he  is  very 
poor.  To  say  nothing  of  the  mental  craving,  which  would 
lead  him  to  welcome  the  sorriest  stranger,  he  labors  un- 
der all  the  material  disadvantages  of  solitude.  He  can 
get  no  temporary  assistance  for  any  work  that  requires 
a  greater  union  of  strength  than  that  afforded  by  his  own 
family,  or  by  such  help  as  he  can  permanently  keep. 
Though  he  has  cattle,  he  cannot  often  have  fresh  meat, 
for  to  get  a  beefsteak  he  must  kill  a  bullock.  He  must 
be  his  own  blacksmith,  wagonmaker,  carpenter,  and  cob- 
bler— in  short,  a  'jack  of  all  trades  and  master  of  none.' 
He  cannot  have  his  children  schooled,  for,  to  do  so,  he 
must  himself  pay  and  maintain  a  teacher.  Such  things 
as  he  cannot  produce  himself,  he  must  buy  in  quantities 
and  keep  on  hand,  or  else  go  without,  for  he  cannot  be 

OBook  IV,  Chapter  II. 


Earned  and  Unearned  Incomes — Land  Rent    29 

constantly  leaving  his  work  and  making  a  long  journey- 
to  the  verge  of  civilization;  and  when  forced  to  do  so, 
the  getting  of  a  vial  of  medicine  or  the  replacement  of  a 
broken  auger  may  cost  him  the  labor  of  himself  and 
horses  for  days.  Under  such  circumstances,  though  na- 
ture is  prolific,  the  man  is  poor.  It  is  an  easy  matter  for 
him  to  get  enough  to  eat ;  but  beyond  this,  his  labor  will 
suffice  to  satisfy  only  the  simplest  wants  in  the  rudest 
way. 

"Soon  there  comes  another  immigrant.  Although 
every  quarter  section  of  the  boundless  plain  is  as  good 
as  every  other  quarter  section,  he  is  not  beset  by  any  em- 
barrassment as  to  where  to  settle.  Though  the  land  is  the 
same,  there  is  one  place  that  is  clearly  better  for  him  than 
any  other  place  and  that  is  where  there  is  already  a  settler 
and  he  may  have  a  neighbor.  He  settles  by  the  side  of 
the  first  comer,  whose  condition  is  at  once  greatly  im- 
proved, and  to  whom  many  things  are  now  possible  that 
were  before  impossible,  for  two  men  may  help  each  other 
to  do  things  that  one  man  could  never  do. 

"Another  immigrant  comes,  and,  guided  by  the  same 
attraction,  settles  where  there  are  already  two.  An- 
other, and  another,  until  around  our  first  comer  there 
are  a  score  of  neighbors.  Labor  has  now  an  effective- 
ness which,  in  the  solitary  state,  it  could  not  approach. 
If  heavy  work  is  to  be  done,  the  settlers  have  a  log- 
rolling, and  together  accomplish  in  a  day  what  singly 
would  require  years.  When  one  kills  a  bullock,  the 
others  take  part  of  it,  returning  when  they  kill,  and  thus 
they  have  fresh  meat  all  the  time.  Together  they  hire 
a  schoolmaster  and  the  children  of  each  are  taught  for 
a  fractional  part  of  what  similar  teaching  would  have 
cost  the  first  settler.     It  becomes  a  comparatively  easy 


30  Thej  Taxation  of'  Unearned  Incomes 

matter  to  send  to  the  nearest  town,  for  someone  is  always 
going.  But  there  is  less  need  for  such  journeys.  A 
blacksmith  and  a  wheelwright  soon  set  up  shops  and  our 
settler  can  have  his  tools  repaired  for  a  small  part  of  the 
labor  it  formerly  cost  him.  A  store  is  opened  and  he 
can  get  what  he  wants  as  he  wants  it ;  a  postoffice,  soon 
added,  gives  him  regular  communication  wij;h  the  rest 
of  the  world.  Then  come  a  cobbler,  a  carpenter,  a  har- 
ness-maker, a  doctor;  and  a  little  church  soon  arises. 
Satisfactions  become  possible  that  in  the  solitary  state 
were  impossible.  There  are  gratifications  for  the  social 
and  the  intellectual  nature — for  that  part  of  the  man  that 
rises  above  the  animal.  The  power  of  sympathy,  the 
sense  of  companionship,  the  emulation  of  comparison  and 
contrast,  open  a  wider,  and  fuller,  and  more  varied  life. 
In  rejoicing,  there  are  others  to  rejoice;  in  sorrow,  the 
mourners  do  not  mourn  alone.  There  are  husking  bees, 
and  apple  parings  and  quilting  parties.  Though  the  ball- 
room be  unplastered  and  the  orchestra  but  a  fiddle,  the 
notes  of  the  magician  are  yet  in  the  strain,  and  Cupid 
dances  with  the  dancers.  At  the  wedding,  there  are  oth- 
ers to  admire  and  enjoy;  in  the  house  of  death,  there  are 
watchers ;  by  the  open  grave,  stands  human  sympathy  to 
sustain  the  mourners.  Occasionally,  comes  a  straggling 
lecturer  to  open  up  glimpses  of  the  world  of  science,  of 
literature,  or  of  art ;  in  election  times  come  stump  speak- 
ers, and  the  citizen  rises  to  a  sense  of  dignity  and  power, 
as  the  cause  of  empires  is  tried  before  him  in  the  struggle 
of  John  Doe  and  Richard  Roe  for  his  support  and  vote. 
And,  by  and  by,  comes  the  circus,  talked  of  months  be- 
fore, and  opening  to  children  whose  horizon  has  been  the 
prairie,  all  the  realms  of  the  imagination — princes  and 
princesses  of  fairy  tale,  mail-clad  crusaders  and  turbaned 


Earned  and  Unearned  Incomes — Land  Rent    31 

Moors,  Cinderella's  fairy  coach,  and  the  giants  of  nur- 
sery lore;  lions  such  as  crouched  before  Daniel,  or  in 
circling  Roman  amphitheater  tore  the  saints  of  God ;  os- 
triches who  recall  the  sandy  deserts;  camels  such  as 
stood  around  when  the  wicked  brethren  raised  Joseph 
from  the  well  and  sold  him  into  bondage ;  elephants  such 
as  crossed  the  Alps  with  Hannibal,  or  felt  the  sword  of 
the  Maccabees ;  and  glorious  music  that  thrills  and  builds 
in  the  chambers  of  the  mind  as  rose  the  sunny  dome  of 
Kubla  Khan. 

"Go  to  our  settler  now,  and  say  to  him:  'You  have 
so  many  fruit  trees,  which  you  planted;  so  much  fenc- 
ing, such  a  well,  a  barn,  a  house — in  short,  you  have  by 
your  labor  added  so  much  value  to  this  farm.  Your 
land  itself  is  not  quite  so  good.  You  have  been  cropping 
it,  and  by  and  by  it  will  need  manure.  I  will  give  you 
the  full  value  of  all  your  improvements  if  you  will  give 
it  to  me  and  go  again  with  your  family  beyond  the  verge 
of  settlement.'  He  would  laugh  at  you.  His  land  yields 
no  more  wheat  or  potatoes  than  before,  but  it  does  yield 
far  more  of  all  the  necessaries  and  comforts  of  life.  His 
labor  upon  it  will  bring  no  heavier  crops,  and,  we  will 
suppose,  no  more  valuable  crops,  but  it  will  bring  far 
more  of  all  the  other  things  for  which  men  work.  The 
presence  of  other  settlers — the  increase  of  population — 
has  added  to  the  productiveness,  in  these  things,  of  labor 
bestowed  upon  it,  and  this  added  productiveness  gives 
it  a  superiority  over  land  of  equal  natural  quality  where 
there  are  as  yet  no  settlers.  If  no  land  remains  to  be 
taken  up,  except  such  as  is  as  far  removed  from  popula- 
tion as  was  our  settler's  land  when  he  first  went  upon 
it,  the  value  or  rent  of  this  land  will  be  measured  by  the 
whole  of  this  added  capability.    If,  however,  as  we  have 


32  The  Taxation  of  Unearned  Incomes 

supposed,  there  is  a  continuous  stretch  of  equal  land, 
over  which  population  is  now  spreading,  it  will  not  be 
necessary  for  the  new  settler  to  go  into  the  wilderness,  as 
did  the  first.  He  will  settle  just  beyond  the  other  settlers, 
and  will  get  the  advantage  of  proximity  to  them.  The 
value  or  rent  of  our  settler's  land  will  thus  depend  on 
the  advantage  which  it  has,  from  being  at  the  center  of 
population,  over  that  on  the  verge.    .    .    . 

"Population  still  keeps  on  increasing,  giving  greater 
and  greater  utility  to  the  land,  and  more  and  more 
wealth  to  its  owner.  The  town  has  grown  into  a  city — 
a  St.  Louis,  a  Chicago,  or  a  San  Francisco — and  still  it 
grows.  Production  is  here  carried  on  upon  a  great  scale, 
with  the  best  machinery  and  the  most  favorable  facili- 
ties; the  division  of  labor  becomes  extremely  minute, 
wonderfully  multiplying  efficiency;  exchanges  are  of 
such  volume  and  rapidity  that  they  are  made  with  the 
minimum  of  friction  and  loss.  Here  is  the  heart,  the 
brain,  of  the  vast  social  organism  that  has  grown  up 
from  the  germ  of  the  first  settlement ;  here  has  developed 
one  of  the  great  ganglions  of  the  human  world.  Hither 
run  all  roads,  hither  set  all  currents,  through  all  the  vast 
regions  round  about.  Here,  if  you  have  anything  to  sell, 
is  the  market;  here,  if  you  have  anything  to  buy,  is  the 
largest  and  the  choicest  stock.  Here  intellectual  activity 
is  gathered  into  a  focus  and  here  springs  that  stimulus 
which  is  born  of  the  collision  of  mind  with  mind.  Here 
are  the  great  libraries,  the  storehouses  and  granaries  of 
knowledge,  the  learned  professors,  the  famous  special- 
ists. Here  are  museums  and  art  galleries,  collections  of 
philosophical  apparatus,  and  all  things  rare,  and  valuable, 
and  best  of  their  kind.  Here  come  great  actors,  and 
orators,  and  singers,  from  all  over  the  world.    Here,  in 


Earned  and  Unearned  Incomes — Land  Rent    33 

short,  is  a  center  of  human  hfe,  in  all  its  varied  manifes- 
tations. 

"So  enormous  are  the  advantages  which  this  land  now 
offers  for  the  application  of  labor  that  instead  of  one 
man  with  a  span  of  horses  scratching  over  acres,  you 
may  count  in  places  thousands  of  workers  to  the  acre, 
working  tier  on  tier,  on  floors  raised  one  above  the  other, 
five,  six,  seven  and  eight  stories  from  the  ground,  while 
underneath  the  surface  of  the  earth  engines  are  throbbing 
with  pulsations  that  exert  the  force  of  thousands  of 
horses. 

"All  these  advantages  attach  to  the  land;  it  is  on  this 
land  and  no  other  that  they  can  be  utilized,  for  here  is 
the  center  of  population— the  focus  of  exchanges,  the 
market  place  and  workshop  of  the  highest  forms  of  in- 
dustry. The  productive  powers  which  density  of  pop- 
ulation  has  attached  to  this  land  are  equivalent  to  the 
multiplication  of  its  original  fertility  by  the  hundred  fold 
and  the  thousand  fold.  And  rent,  which  measures  the 
difference  between  this  added  productiveness  and  that 
of  the  least  productive  land  in  use,  has  increased  accord- 
ingly. Our  settler,  or  whoever  has  succeeded  to  his  right 
to  the  land,  is  now  a  millionaire.  Like  another  Rip  Van 
Winkle,  he  may  have  lain  down  and  slept ;  still  he  is 
rich — not  from  anything  he  has  done,  but  from  the  in- 
crease of  population.  There  are  lots  from  which  for 
every  foot  of  frontage  the  owner  may  draw  more  than 
an  average  mechanic  can  earn ;  there  are  lots  that  will 
sell  for  more  than  would  suffice  to  pave  them  with  gold 
coin.  In  the  principal  streets  are  towering  buildings,  of 
granite,  marble,  iron  and  plate  glass,  finished  in  the  most 
expensive  style,  replete  with  every  convenience.  Yet  they 
are  not  worth  as  much  as  the  land  upon  which  they  rest 


34  The  Taxation  of  Unearned  Incomes 

— the  same  land,  in  nothing  changed,  which  when  our 
first  settler  came  upon  it  had  no  value  at  all." 

But,  it  may  be  said,  at  least  many  of  the  present  land- 
owners are  persons  who  have  made  their  savings  from 
what  they  have  earned  and  have  chosen  to  invest  their 
savings  in  land  rather  than  elsewhere.  Have  they  not, 
in  their  savings,  given  the  community  as  much  value  as 
they  draw  in  rent?  The  answer  may  well  be  that  they 
have  given,  to  that  part  of  the  community  from  whom 
their  rent  income  is  derived,  nothing  whatever.  If  A, 
who  has  saved  $10,000,  uses  it  to  buy  a  piece  of  land  from 
B,  he  is  merely  paying  B  for  the  privilege,  previously  en- 
joyed by  B,  of  receiving  rent  from  others  for  the  use  of 
something  which  neither  he  nor  any  other  individual  pro- 
duced and  the  use  of  which  would  be  equally  available 
had  no  owner  or  purchaser  of  land  ever  been  born.  In 
turn,  B  has  now  the  $10,000  of  accumulations  and  it  is 
quite  possible  that  he  may  use  it  in  some  way  that  will 
increase  the  annual  product  of  industry.  If  so,  the  com- 
munity, or  some  members  of  the  community,  will  come 
to  be  paying  B,  in  interest  on  capital,  for  services  which, 
without  A's  saving,  would  not  have  been  available,  while 
they  will  be  paying  A,  in  rent,  for  benefits  from  the  use 
of  land,  which  are  not  due  to  any  individual's  work  or 
savings.  If,  before,  the  community  was  paying  the  land- 
owner B  a  rent  while  getting  no  service  that  could  fairly 
be  regarded  as  coming  from  him  now  it  is  making  pay- 
ments to  both  A  and  B,  as  rent  and  interest  respectively, 
and  receiving  services  in  return  from  only  one.  If,  be- 
fore, B  the  landowner  was  a  pensioner  to  whom  the 
community  gave  something  for  nothing,  now  A  has  be- 
come the  pensioner,  having  bought  out  B,  and  is  receiv- 
ing, from  the  rest  of  the  community,  something  for  noth- 


Earned  and  Unearned  Incomes — Land  Rent    35 

ing.  For  it  should  be  clearly  evident  that  the  $10,000 
paid  to  B  for  the  land  is  not  a  service  rendered  to  C,  D, 
or  E,  who  are  the  persons  that  have  to  pay  A  for  the 
use  of  the  land.  Yet  much  of  emphasis  is  commonly  di- 
rected to  the  assertion  that  the  land-using  part  of  the 
community  ought  to  pay  rent  to  landowners  because 
these  landowners  have  in  many  cases  paid  previous  land- 
owners for  the  land  and  despite  the  fact  that  none  of  the 
landowners  in  the  series  can  be  said  to  have  rendered  any 
service  to  those  from  whom  they  collect  rent  payment. 
In  other  words,  it  is  asserted  that  C,  D  and  E  ought  to  be 
obliged  to  pay  A  for  no  service  rendered  by  him  or  by 
anyone,  simply  because  A  previously  paid  $10,000,  not  to 
C  or  D  or  E,  but  to  B.  Is  such  a  doctrine  good  utilita- 
rianism?   Is  its  application  good  social  policy? 

The  same  principles  apply  in  the  case  of  such  natural 
resources  as  coal  and  iron  mines,  oil  and  natural  gas 
wells  and  power  sites.  The  incomes  derived  by  the  own- 
ers of  the  steel  trust  and  others  from  such  resources 
represent,  not  service,  but  the  privilege  of  drawing  trib- 
ute from  the  masses  as  a  condition  to  allowing  these 
masses  to  make  use  of  the  bounty  of  nature.  And  those 
enthusiasts  for  government  ownership  of  all  natural  re- 
sources, who  would  have  the  public  buy  up  these  re- 
sources from  their  present  owners  at  current  values  are 
simply  proposing  that  the  tribute  now  collected  as  rent 
or  royalties  or  dividends  shall  be  given  an  added  sanc- 
tion and  shall  be  collected  in  the  future  as  interest  on  gov- 
ernment bonds,  to  the  payment  of  which  the  government 
will  be  pledged.  These  natural  resources  had  no  cost  of 
construction.  Their  salable  value  is  but  the  capitalization 
of  tribute.     To  issue  government  bonds  for  them  is  to 


36  The  Taxation  oi^  Unearne^d  Incomes 

make  this  tribute  rendering  more  irrevocable,  perhaps, 
than  before. 

The  suggestion  has  been  made  (most  prominently  and 
effectively  by  Henry  George)  that  the  proper  way  for 
the  community  to  deal  with  all  such  unearned  incomes 
is  to  appropriate  them  to  public  use  by  the  method  of  tax- 
ation. Whether  or  not  it  is  possible  or  desirable  to  take 
such  unearned  incomes  by  taxation,  it  should  be  clear 
that  under  the  competitive  individualistic  system  of  busi- 
ness, no  other  method  of  preventing  the  individual  receipt 
of  such  incomes  is  possible.  If,  for  example,  when  the 
owner  and  user  of  a  piece  of  land  were  different  per- 
sons, the  owner  could  be  forbidden  to  charge  as  rent 
the  surplus,  due  to  advantageous  situation,  yielded  by 
that  specific  piece  of  land  above  the  ordinary  returns 
to  labor  and  capital,  the  user  would  proceed  to  appro- 
priate such  surplus.  For  the  fact  that  the  titular  owner 
was  not  allowed  to  charge  rent  would  not  increase  the 
supply  of  the  goods  produced  or  marketed  on  the  land, 
and,  since  price  is  fixed  by  demand  and  supply,  would 
not  lower  the  price  of  such  goods.  The  producer  or 
dealer  who  was  fortunate  enough  to  have,  for  nothing, 
the  use  of  a  piece  of  land  so  good  or  so  advantageously 
situated  as  to  give  him  a  larger  return  than  would  cover 
his  outlays  for  wages  and  interest  (including  interest  on 
his  own  capital)  and  pay  for  his  own  time,  would  not, 
on  that  account,  sell  his  output  below  the  market  price 
charged  by  competitors.  But  even  if  he  did,  his  compet- 
itors need  not  lower  their  price,  since  there  has  been 
no  increase  in  supply  or  decrease  in  demand,  and  since, 
therefore,  the  demand  on  other  producers  or  dealers  by 
consumers  remaining  unsatisfied,  will  be  as  great  as  be- 
fore.    So,  even  if  the  favored  producer  does  lower  his 


Earned  and  Unearned  Incomes — Land  Rent    37 

price  (as  it  is  safe  to  say  he  will  not),  that  would  merely 
pass  the  favor  to  a  privileged  few  of  the  consumers  of  the 
article.  The  price  could  not  be  reduced  to  all  consum- 
ers unless  reduced  by  all  other  producers. 

Furthermore,  some  of  these  other  producers  are  pro- 
ducing under  conditions  such  that  their  labor  and  capital 
produce  little  or  no  surplus  for  rent ;  they  may  be,  for 
instance,  producing  on  land  so  poor  for  the  purpose  that 
it  yields  substantially  no  surplus.'^  For  them  to  reduce 
their  price  would  be  to  curtail  their  wages  or  interest  or 
both.  In  that  case,  the  attempt  to  terminate  rent  would 
result  in  lessening  other  kinds  of  incomes  of  the  produc- 
ers of  the  goods  in  question  and  giving  these  incomes  to 
the  consumers  of  the  goods.  But  these  consumers  can 
be  no  other  than  the  producers  of  other  goods.  The  in- 
jured producers  would,  therefore,  under  a  regime  of  free 
choice  of  industry,  change  their  occupations  and  the  line 
of  their  investment.  In  short,  rent  can  not  be  distributed 
to  all  consumers  of  all  goods,  and  to  give  it  to  some  con- 
sumers or  to  transfer  it  to  tenants  leaves  as  large  an  ele- 
ment of  special  privilege  in  the  situation  as  before.  Un- 
less, then,  appropriation  or  taxation  of  rent,  by  and  for 
the  whole  community,  is  possible,  the  situation  is  irreme- 
diable under  the  competitive  system  of  business. 

It  is  perhaps  desirable  to  add  an  illustration  from  the 
economics  of  railroad  transportation.  Suppose  two  cit- 
ies to  be  connected  by  a  railroad  which  runs  through  a 
narrow  river  valley.  The  traffic  is  more  than  this  line 
can  handle.  Another  line  is  essential  but  the  second  has 
to  follow  a  winding  and  hilly  route.     The  cost  of  car- 

7  Or  they  may  be  producing  on  what  economists  call  the  inten- 
sive margin. 


70774 


38  The  Taxation  of  Unearned  Incomes 

riage  of  goods  on  the  second  road  is  necessarily  higher. 
The  first  road  has  an  advantage  of  situation.  It  has  an 
exclusive  use  of  the  better  route,  from  which  it  derives 
a  substantial  revenue.  For  it  can  and  will  charge  rates 
as  high  as  does  the  winding  hilly  road  and  will  still  get 
plenty  of  traffic.  To  require  rate  reduction  of  the  first 
road  will  not  transfer  this  excess  income  to  the  general 
public.  For,  since  this  river-valley  road  cannot  carry 
all  of  the  traffic,  some  shippers,  at  least,  must  pay  rates 
high  enough  to  make  worth  while  the  operation  of  the 
other  railroad.  Otherwise  it  will  be  abandoned — or 
never  built.  And  to  reduce  rates  only  on  the  river-valley 
road  is  merely  to  transfer  to  a  favored  group  of  ship- 
pers, and  not  to  the  whole  public,  this  road's  revenue 
from  a  natural  advantage  of  situation  and  from  the 
growth  of  the  community  served.  The  excess  income 
of  the  river-valley  road  is  situation  rent.  Taxation  of 
rent  by  the  public  can  be  made  to  secure,  for  the  general 
benefit,  as  much  of  this  income  as  it  is  desired  to  get. 
Rate  regulation  can  not. 

One  thing,  at  least,  can  be  asserted  with  positiveness, 
viz.,  that  a  tax  on  the  rental  value  of  all  land,  however 
used,  can  neither  be  shifted  from  one  landowner  to 
others  nor  from  landowners  as  a  class  to  any  other  class. 
The  reasons  are  that  such  a  tax  can  in  no  wise  limit  the 
supply  of  land  or  determine  the  direction  of  its  use.  It 
cannot  decrease  the  supply  of  land  because  land,  as  we 
have  defined  it,  is  not  humanly  produced.  If  it  were,  a 
lax  on  it  might  decrease  the  amount  of  it  and  so  make 
rent  higher.  If  the  landowners  who  lease  their  land 
charge  higher  rents  for  its  use,  tenants  will  endeavor  to 
economize  in  the  use  of  land  and  some  of  the  owners 
will  find  their  land  idle  and  yielding  no  revenue.    These 


Earned  and  Unearned  Incomes — Land  Rent    39 

will  quickly  reduce  their  rent  charges,  the  more  so  if  un- 
used land  is  taxed  at  the  same  rate  as  used  land,  since 
--nly  so  can  they  avoid  loss. 

We  may  state  the  matter  convincingly  in  a  somewhat 
different  way  if  we  call  attention  to  the  fact  that  the 
landowners  were  presumably,  before  the  tax  was  laid, 
charging  all  the  rent  they  could  get.  There  is  nothing  in 
the  tax  to  make  tenants  willing  to  pay  more  or  land  more 
difficult  to  hire.  Supposing  the  tax  to  apply  also  to  un- 
used land,  even  more  land  will  probably  be  on  the  mar- 
ket for  hire  than  would  otherwise  be  the  case,  because 
of  the  loss  to  owners  in  leaving  their  land  idle.  Hence, 
owners  cannot  raise  their  rents. 

To  put  the  matter  in  still  another  way,  it  may  be  said 
that  rent  is  the  surplus  which  can  be  produced  by  labor 
and  capital  on  any  piece  of  land  above  what  that  labor 
and  capital  could  produce  on  the  poorest  land  in  use,^  for 
which  no  rent  is  paid  and  which  has  either  no  value  or  a 
purely  speculative  value  based  on  prospects.  A  tax  on 
the  value  of  land  would  not  increase  this  surplus  yield  on 
the  superior  land,  and  could  not,  therefore,  increase 
rent. 

Let  us  suppose  that  a  tax  is  levied  upon  a  piece  of 
land  because  of  its  value,  because,  that  is,  of  its  superi- 
ority over  the  poorest  land  in  use  and  in  proportion  to 
that  superiority,  and  that  the  owner  of  the  land  tries,  be- 
cause of  the  tax,  to  charge  more  rent  to  the  tenant.  In 
that  case  the  tenant  may  resort  to  poorer  land  on  which 
the  rent  and,  therefore,  the  tax  is  insignificant  or  zero 

8  Or,  more  fully  stated  in  the  terminology  of  economics,  above  the 
amount  which  labor  and  capital  could  produce  on  either  the  exten- 
sive or  the  intensive  margin  of  production. 


40  The  Taxation  of  Unearned  Incomes 

and  leave  without  rent  and  with  his  tax  nevertheless  to 
be  paid,  the  too  grasping  landowner.  Such  a  prospect 
or  its  actual  realization  must  cause  the  owners  of  land  to 
keep  down  their  rent  charges  and  to  pay  the  tax  them- 
selves. 

Since  a  tax  on  land  values — or  on  land  rent,  for  this 
comes  to  the  same  thing  ^ — cannot  raise  rents,  it  can  in 
no  way  raise  the  prices  which  tenants  charge  for  the 
goods  they  produce  or  sell  on  the  land.  But  can  it  raise 
the  prices  charged  by  the  owners  of  the  land  for  the 
goods  they  produce  or  sell  on  it  when  they  themselves  use 
their  land?  Clearly  not.  Such  owners  will  not,  because 
of  the  tax,  produce  any  less  of  the  goods  in  the  produc- 
tion of  which  they  are  engaged.  Refusing  to  produce 
the  goods  would  not  relieve  them  of  the  tax.  They  will 
produce  as  many  goods  as  if  there  were  no  tax.  And  if 
the  tax  does  not  make  such  goods  any  scarcer,  their  price 
will  not  be  made  higher.  In  other  words,  if,  before  the 
tax  is  laid,  landowners  are  charging  for  their  goods  all 
they  can  get,  the  tax  will  not  cause  them  to  charge  any 
more  for  they  cannot  get  any  more. 

If,  then,  we  look  at  the  matter  of  general  land-value 
taxation  from  any  point  of  view  whatever,  we  arrive 
at  the  same  conclusion,  viz.,  that  a  tax  on  land  value  or 
land  rent  is  paid  by  the  owner  of  the  land  and  by  no  one 
else,  that  the  owner  cannot  because  of  such  a  tax  raise 
either  his  rent  or  the  prices  of  his  goods,  but  that,  in- 

0  Although  the  capital  value  is  itself  affected  by  the  tax  and  falls 
as  the  tax  rises,  while  the  rental  value  is  relatively  independent  of 
the  tax.  It  is  therefore  simpler  to  tax  economic  rent  than  to  tax 
capitalized  value.  Indeed,  a  tax  on  rent  of  lOO  per  cent,  would 
reduce  capitalized  value  to  zero. 


Inequality  of  Earned  Incomes  41 

deed,  productive  land  held  out  of  use  by  speculators  is 
forced  onto  the  market  so  that,  if  land  rent  changes  at 
all,  the  direction  of  the  change  is  likely  to  be  downward. 
Other  taxes  may  discourage  production.  But  land-value 
taxation,  so  far  as  it  has  any  effect  at  all  on  production, 
operates  to  increase  it  and  thus  to  reduce  prices  or  to  raise 
wages  or  both. 

§  6 
Inequality  of  Earned  Incomes 

Suppose,  however,  that  it  eventually  becomes  possible 
to  do  away  with  all  unfair  business  practices,  to  stamp 
out  the  industry  of  the  business  highwayman,  to  break 
up,  or  regulate,  or  operate  by  the  public,  all  monopolies 
so  that  justice  shall  be  done  to  the  consumers  of  monopo- 
lized goods,  to  make  birth  rates  in  different  classes  even 
enough  and  educational  opportunity  general  enough  so  as 
to  avoid  the  partial  monopoly  which  the  relatively  few 
now  have  of  valuable  training  and  skill,  and  to  take  by 
taxation  for  public  purposes  the  unearned  income  from 
land  or  sites.  Would  we  then  have  the  ideal  economic 
society?  There  would  still  be  inequality.  The  man  of 
exceptional  genius  might  still  find  it  possible  to  secure 
very  great  income,  and  the  man  who  had  received  large 
inheritances  from  his  ancestors  (assuming  the  passing 
of  wealth  to  be  substantially  unchecked)  would  have  a 
large  income  earned,  not  by  his  own,  but  by  his  parents' 
and  grandparents'  saving.^"    It  is  conceivable  that  the 

1°  It  must  be  admitted  that  inheritance  of  property  accumulated 
in  a  past  when  exploitation  was  still  possible  would  not  always  be 
inheritance  of  earned  property.  It  might  very  plausibly  be  argued, 
therefore,  that  a  taxation  system  adapted  to  a  period  of  transition 


42  The  Taxation  oif  Unearned  Incomes 

amount  of  inequality  even  yet  resulting  would  be  dan- 
gerous in  a  democracy.  Large  incomes,  even  if  fairly 
earned  by  the  individuals  or  families  enjoying  them, 
might  possibly  confer  the  power  of  corruption  and  lead 
to  the  temptation  to  use  such  power  for  the  gaining  of 
unearned  income  in  the  future.  That  the  danger  would 
be  as  great  as  at  present  can  hardly  be  credited,  and  we 
certainly  need  not  now  be  prepared  definitely  to  advo-. 
cate  taxation  of  earned  incomes  on  such  grounds.  But 
the  believers  in  democracy  will  insist  that  democracy 
must  at  all  events  be  protected,  and  if,  by  any  chance, 
it  should  develop  that  inequality,  even  of  earned  incomes, 
were  great  enough  to  threaten  democracy,  sufficient  lim- 
itations, by  taxation  of  incomes  or  inheritances  or  other- 
wise, ought  probably  to  be  put  upon  such  inequality. 

Again,  though  all  incomes  be  earned,  it  may  be  con- 
tended that  the  utility  of  a  unit  of  money  (e.  g.,  a  dollar) 
to  the  man  who  possesses  many  such  units  is  so  much 
less  than  its  utility  to  the  man  who  earns  few  as  to  justify 
taxing  the  former  more  heavily  and  spending  some  of 
the  money  really  earned  by  the  former,  for  the  benefit  of 
the  latter.  This  is  the  theory  on  which  charitable  relief 
is  largely  based  and  it  is  also  the  basis  of  the  so-called 
ability  theory  of  taxation. 

Clearly,  however,  there  are  dangers  in  carrying  such  a 
policy  too  far.  Those  whose  ability  is  high  in  one  fine 
may,  to  be  sure,  often  be  persons  of  only  mediocre  ability 
in  other  lines  of  activity ;  but  if  the  line  in  which  they 
show  ability  is  one  in  which  ability  is  scarce  relative  to 
the  use  society  has  for  it,  such  persons  need  to  be  en- 

away  from  unjust  economic  institutions  should  contain  features 
which  might  not  be  permanently  desirable. 


Inequality  of  Earned  Incomes  43 

couraged  to  make  full  use  of  their  ability  and  it  is  fur- 
thermore desirable  that  they  should  have  descendants 
who  inherit  their  capacity  for  such  efficient  service.  A 
system  of  taxing  earned  incomes  which  should  come  too 
close  to  leaving  individual  incomes  equal  would  almost 
certainly  discourage  the  revealing  of  ability  above  the 
average  by  those  who  have  it  or  are  capable  of  devel- 
oping it,  unless  invidious  distinctions  of  honor  and  rank 
in  society  were  to  take  the  place — if  they  could  do  so 
effectually — of  differences  in  creature  comforts. 

We  need  not  say  that  the  time  can  never  come  when 
the  abler  members  of  a  group  will  put  forth  their  full 
efforts  for  the  welfare  of  their  weaker  social  brothers 
and  sisters,  who,  in  turn,  will  gratefully  accept  equality 
of  incomes  bestowed  upon  them  by  those  whose  produc- 
tive efficiency  is  greater  than  theirs.  But  it  is  not  to  be 
assumed  that  this  time  has  yet  come,  if  it  ever  should  or 
can.  Furthermore,  it  is  greatly  to  be  desired  that  society 
should  breed  more  largely  from  its  abler  than  from  its 
inferior  members,  that  those  who  have  high  special  abili- 
ties, provided  these  abilities  are  of  a  useful  kind,  should 
be  well  represented  in  posterity.  It  may  indeed  be  true 
that  there  is  now  altogether  too  much  of  a  tendency  for 
society  to  breed  from  inferior  strata  rather  than  from 
the  superior.  But  a  change  in  moral  standards  and  ideals, 
a  growing  pride  in  the  ability  to  pass  on  worth-while 
characteristics,  may  some  day  change  this.  Absolute 
equality  of  incomes  among  adults,  on  the  other  hand, 
would  negative  it,  unless  those  of  higher  ability  were 
willing  to  take  for  themselves  and  their  children  fewer 
and  poorer  creature  comforts  than  their  efforts  gave  to 
their  inferior  brothers  and  sisters.  Again,  incomes  based 
on  size  of  families  would  enable  those  persons  who  irres- 


44  The;  Taxation  oi^  Unearned  Incomes 

ponsibly  have  large  families,  together  with  their  numer- 
ous children,  to  exploit  almost  without  limit  those  who, 
by  themselves  having  small  families,  endeavored  to  pre- 
vent population  from  outrunning  the  possibilities  of  com- 
fortable subsistence.  Whether  or  not,  therefore,  we 
might  expect  the  efficient  eventually  to  be  willing  to  put 
forth  their  best  efforts  that  the  inefficient  might  fare 
equally  well,  it  is  not  even  to  be  desired  that  the  efficient 
should  be  willing  to  put  forth  their  best  efforts  that  the 
inefficient  might  have  as  many  or  more  children  and  as 
well  cared  for  as  those  whose  superior  ability  produced 
a  greater  volume  of  goods. 

A  parallel  argument  can  be  made  regarding  interest 
on  the  accumulation  of  capital.  It  is  perhaps  not  even 
desirable  that  those  who  save  capital  should  have  to  see 
the  interest  earned  by  it  go  to  the  support  and  increase 
of  the  children  of  the  incapable  and  unthrifty.  And  cer- 
tainly one  cannot  but  experience  grave  doubt  whether 
capital  would  be  saved  in  anything  like  the  present  degree 
if  no  income  whatever  were  allowed  from  it  either  to  the 
accumulator  or  to  his  children. 

It  is  to  be  hoped  that  no  one  will  draw  from  the  above 
remarks  relative  to  the  competition  of  individuals  within 
any  community  and  fitness  to  survive,  the  conclusion  that 
any  selective  purpose  is  secured  by  allowing  the  private 
receipt  of  what  we  have  called  unearned  incomes.  Su- 
perior efficiency  in  producing  worth-while  goods  is  a  very 
different  thing,  in  its  relation  to  societal  interests,  from 
superior  craftiness  in  getting  something  for  nothing.  A 
society  composed  of  persons  of  the  former  characteristic 
would  have  at  hand  the  means  for  pleasurable  existence 
on  the  part  of  all  its  members.     A  society  composed  of 


Inequality  of  Earned  Incomes  45 

persons  of  the  latter  characteristic  would  be  one  in  which 
each  man's  hand  was  "turned  against  his  neighbor." 

If  all  exploitive  activities  were  terminated  and  if  all  un- 
earned incomes  derived  from  advantages  of  situation, 
etc.,  as  distinct  from  unethical  business  practices,  were 
appropriated  by  the  public,  the  individual  receipt  of  un- 
earned incomes  would  be  impossible.  It  would  then  be 
necessary  to  decide  whether  and  how  far  the  taxing  of 
earned  incomes  for  the  sake  of  using  the  funds  to  bene- 
fit those  whose  earning  power  was  small,  could  be  re- 
garded as  a  proper  public  policy.  It  is  entirely  possible 
that  if  the  receipt  of  unearned  incomes  by  individuals 
were  henceforth  completely  prevented,  the  inequality  re- 
maining would  not  be  such  as  to  justify  further  attempts 
at  leveling.  For  further  attempts  in  this  direction  might 
be  thought  of  as  involving  the  establishment  of  new 
privileged  interests,  the  privilege  in  question  being  to 
those  who  produce  least  to  enjoy  equally  or  more  nearly 
equally  than  their  productive  efficiency  would  seem  to 
justify,  with  those  who  produce  much. 

However  this  and  other  problems  ought  to  be  settled, 
it  is  clear  that  economic  democracy  is  not  to  be  attained 
without  thought  and  that  it  is  unlikely  to  be  attained  in 
full  all  at  once.  Mobs  and  reigns  of  terror  will  not  in- 
troduce it.  If  it  be  true  that  the  exploited  masses  can- 
not trust  the  teaching  of  those  lawyers,  statesmen  and 
others,  who  constitute  the  intellectual  defenders  of  things 
as  they  are,  it  is  also  true  that  without  intelligent  leader- 
ship in  statecraft  and  an  understanding,  by  their  leaders, 
of  economic  principles,  an  understanding  zvhich  the  so- 
cialist leaders  certainly  have  not,  blunders,  discredit  and 
eventual  rejection  will  be  the  probable  fate  of  those  who 
might  become  the  effective  forces  of  reform. 


46  The  Taxation  of*  Unearned  Incomes 

§7 

Recapitulation 

At  the  beginning  of  this  essay  it  was  pointed  out  that 
before  economic  reform  can  be  profitably  discussed, 
there  must  be  an  intelHgent  comprehension  of  the  ex- 
isting system  of  economic  organization.  For  the  bene- 
ficiaries of  the  present  system  have  their  intellectuals  who 
can  give  it  theoretical  justification  and  they  know  how, 
practically,  to  run  it ;  while  its  violent  overthrow  by  ignor- 
ant revolutionary  groups  would  be  almost  certain  to  be  at- 
tended with  mistakes  calamitous  enough  to  discredit 
them  and  would  quite  possibly  result  in  the  restoration 
of  the  temporarily  outlawed  system  of  privilege. 

Addressing  ourselves  to  the  securing  of  a  birds-eye 
view  of  the  existing  economic  system,  we  found  it  to  be 
one  of  division  of  labor  with  voluntary  specialization 
of  individuals  and  their  property  in  different  lines  of 
production.  Prices  are  the  inducements  by  which  men  are 
led  to  sell  goods  or  to  produce  goods  for  sale.  Compulsion 
might  be  substituted  but  probably  would  not  be  popularly 
approved.  Competition  tends  towards  partial  equalization 
of  returns  in  different  lines  but  does  not  necessarily  re- 
sult in  complete  equalization.  Thus,  in  any  given  relation 
of  public  demand  for  two  different  articles,  there  may  be 
some  persons  and  some  sites  as  to  whom  and  whose 
owners  it  is  a  matter  of  indiiference  whether  they  should 
be  devoted  to  producing  the  one  article  or  the  other.  But 
there  may  also  be  persons  whose  efficiencies  are  such 
that  they  secure  much  larger  incomes  where  they  are  than 
they  could  get  in  an  alternative  line  or,  perhaps,  than 
many  persons  in  such  an  alternative  line  do  get;  and  a 


Recapitulation  47 

parallel  statement  can  be  made  regarding  the  use  of 
specific  pieces  of  land  and  the  interests  of  their  owners. 

Inequality  results,  then,  so  far  as  returns  to  labor  are 
concerned,  from  differences  of  ability  innate  or  acquired. 
So  far  as  it  results  from  differences  of  ability  which  are 
innate,  it  is  undesirable  that  the  multiplication  of  those 
of  less  ability  should  be  encouraged  at  the  expense  of 
those  of  greater  ability.  So  far  as  inequality  of  incomes 
is  due  to  differences  of  opportunity,  these  differences 
are  partly  a  matter  of  education  and  partly  a  matter  of 
comparative  birth  rates.  Low  wages  in  any  group  are 
likely  to  be  due  to  the  numbers  in  that  group,  competing 
for  employment,  and  these  numbers  depend  as  much 
on  comparative  birth  rates  as  on  the  avenues  of  escape 
from  the  group  through  education. 

In  present-day  economic  society  incomes  are  divided 
into  wages  for  labor  (including  profits  to  self-employed 
labor),  interest  on  capital  and  rent  on  land.  Wages  of 
labor  are  earned  or  unearned,  as  the  terms  are  here  used, 
according  as  they  are  received  for  an  equivalent  serv- 
ice rendered.  If,  for  example,  the  owners  and  con- 
trollers of  an  industry  derive  a  monopoly  profit  because 
their  management  has  resulted  in  the  building  up  of  a 
monopoly  which  exploits  the  public,  much  of  the  so- 
called  profit  is  unearned.  So,  also,  both  the  controllers 
of  a  business  and  their  hirelings,  if  engaged  in  corrupting 
legislators  or  in  the  practice  of  unfair  competition  can 
not  be  said  really  to  earn  what  they  receive.  The  same 
distinction  may  be  made  as  regards  income  from  capital. 
Interest  is  unearned  when  the  capital  is  used  in  anti- 
social and  exploitive  ways.  It  is  earned  when  the  use 
of  the  capital  confers  an  equivalent  benefit  upon  those 
from  whom,  in  the  last  analysis,  the  interest  is  drawn. 


48  The  Taxation  op  Unearned  Incomes 

As  to  land,  its  rent,  resulting  from  natural  advantages 
or  from  advantages  of  situation  relative  to  population 
centers  (pure  rent  as  distinguished  from  interest  on  im- 
provements), is  clearly  unearned,  and  is  no  less  unearned 
because  the  owner  may  have  paid  some  previous  recipient 
the  so-called  value  of  the  land  for  the  privilege  of  getting 
a  return  from  the  rest  of  the  community  for  no  service 
rendered.  And  the  rent  of  land  is  unearned  whether  the 
land  is  used  in  socially  desirable  ways  or  not,  for,  in 
any  case,  the  owner  is  in  no  sense  responsible  for  the  ex- 
istence or  the  advantages  for  business,  of  his  land. 

Towards  the  end  of  the  essay  we  raised  the  question 
whether,  supposing  every  kind  of  unearned  income  to  be 
terminated  or  publicly  appropriated,  it  would  be  desirable 
for  the  community  to  tax  large  earned  incomes  (or  inher- 
itances) at  a  high  rate  for  the  purpose  of  preventing,  in 
large  part,  what  inequality  might  otherwise  still  remain. 
For  the  view  that  this  should  be  done  could  be  cited  a 
conceivable  danger  to  democracy  from  inequality  even  of 
earned  incomes,  in  case  such  earned  incomes  proved  to 
be  very  unequal,  and  the  theory  of  charitable  relief  ac- 
cording to  which  units  of  wealth  give  greatest  utility  to 
those  whose  wealth  is  small.  But,  on  the  other  hand,  it 
seemed  that  efficiency,  survival  of  the  best,  and  accumula- 
tion of  capital  might  all  be  militated  against  by  too  great 
an  approach  to  equality.  Indeed,  equality  of  incomes  it- 
self, if  productive  accomplishments  are  greatly  uneven, 
is  a  form  of  privilege  in  favor  of  persons  who  contribute 
less  than  they  receive. 

In  any  event,  we  are  brought  back  to  the  conclusion 
that  the  establishment  of  economic  democracy  is  not  a 
simple  task.  And  it  cannot  be  successfully  accomplished 
unless  the  great  mass  of  the  disinherited  who  would  fain 


Recapitulation  49 

establish  a  better  system  are  led  by  men  of  greater  under- 
standing of  economic  principles  than  is  possessed  by  pres- 
ent-day Marxian  theorists.  Unfortunately,  it  seems  to  be 
these  theorists  who  have  attained  chief  influence  and 
leadership  among  the  supporters  of  radical  economic  re- 
forms. 

The  path  of  democracy  is  in  truth  a  way  of  peril,  beset 
with  the  pitfalls  of  a  too  common  ignorance  and  flanked 
by  the  ambushed  forces  of  privilege.  Yet  only  through 
this  pathway  can  there  be  any  hope  at  all  of  the  eventual 
attainment  of  a  better  economic  order.  For  although,  in 
a  democracy,  interested  persons  and  classes  are  ever  seek- 
ing to  confuse  and  mislead,  in  matters  of  economic  policy, 
a  citizenry  unduly  prone  to  believe  itself  championing 
worthwhile  reform  v^hen  it  is  really  but  subjecting  itself 
to  a  more  hopeless  exploitation ;  nevertheless  government 
by  any  limited  class  would  be  almost  an  absolute  guaran- 
tee of  the  self-aggrandizement  of  that  class  at  the  ex- 
pense of  all  others.  With  democracy  there  is  at  least  the 
chance  that  education  and  the  resulting  growth  of  intelli- 
gence may  lead  to  better  things.  We  need  not — if  we 
are  scientists  we  cannot — have  the  faith  in  democracy 
sometimes  professed  by  the  practical  politician  anxious  to 
flatter  the  common  man  into  giving  him  his  support  and 
vote,  that  "the  people"  will  always  know  and  do  what  the 
general  well-being  requires.  But  we  may  have  a  limited 
faith  in  democracy  as  the  only  possible  pathway — if  any 
such  pathway  there  be — to  an  economic  system  funda- 
mentally expedient  and  just. 


The  savage  beasts,  in  Italy,  have  their  particular  dens,  they  have 
their  places  of  repose  and  refuge;  but  the  men  who  bear  arms,  and 
expose  their  lives  for  the  safety  of  their  country,  enjoy  in  the  mean- 
time nothing  more  in  it  but  the  air  and  light ;  and,  having  no 
houses  or  settlements  of  their  own,  are  constrained  to  wander  from 
place  to  place  with  their  wives  and  children. 

Tiberius  Gracchus 

( Plutarch's  Lives. ) 

We  demand  prompt  action  by  Congress  to  open  up  for  de- 
mobilized soldiers,  sailors  and  marines  the  opportunity  to  employ 
their  labor  on  the  unused  land  and  natural  resources  of  our  coun- 
try. And  we  don't  want  to  be  confined  to  swamp  lands,  cut-over 
stump  lands  and  desert  lands,  either.  We  hold  that  the  hundreds 
of  millions  of  idle  acres  of  good  agricultural,  mineral  and  timber 
lands  and  vacant  city  lots  are  none  too  good  for  the  use  of  the 
soldiers  who  are  conceded  to  have  saved  civilization  at  $30  per 
month,  minus  large  reductions  for  fines,  insurance,  etc.  .  .  .  Na- 
ture's bounty  has  provided  Uncle  Sam  and  all  his  nephews  with  ample 
opportunity  for  all  to  work  if  the  government  will  only  let  down 
the  bars   of  monopoly   and   privilege. 

(From  a  circular  issued  by  The  Private  Soldiers  and  Sailors 
Legion  of  the  United  States  of  Ajierica — quoted  in  the  Ne^v: 
York  World,  April  9,  1919.) 


(50) 


II 

THE  RENT  OF  LAND  AND  ITS  TAXATION  i 

§  1 
Land  Rent  as  a  Marginal  Product  of  Land 

In  The  Theory  of  Earned  and  Unearned  Incomes,  the 
writer  had  occasion  to  suppose  the  existence  of  a  piece 
of  land  on  which  the  labor  of  five  men  working  with  the 
aid  of  improvements  and  equipment  worth  $5,000,  pro- 
duced a  yearly  product  above  repair  and  depreciation 
costs,  of  $2,200.  Of  this  $2,200,  wages  constituted 
$1,500,  interest  (at  8  per  cent.)  $400,  and  $300  a  year 
remained  as  rent.  This  $300  measures,  roughly,  the 
amount  of  rent  the  owner  could  secure  from  a  tenant. 
It  is  the  surplus  produced  on  the  land,  above  the  remun- 
eration of  the  labor  and  waiting  (i.  e.,  saving,  or  the  post- 
ponement of  consumption)  used.  But  the  remuneration 
of  waiting  or  saving,  the  interest  on  capital,  is  fixed  by  de- 
mand and  supply  at  a  point  where  it  equals  the  marginal 
productivity  of  waiting.^  Likewise,  the  remuneration  of 
labor  is  fixed  by  demand  and  supply  at  a  point 
where  it  equals  the  marginal  product  of  labor.^ 
Hence,  to  say  that  a  piece  of  land  yields  per 
year  a  surplus  of  $300  over  interest  to  waiting  and 
wages  of  labor  is  to  say  that  it  yields  a  surplus  of  $300 

1  This  essay  is  reprinted  with  considerable  changes  and  additions, 
from  Chapter  VI  of  T/ie  Theory  of  Earned  and  Unearned  Incomes. 

2  The  Theory  of  Earned  and  Unearned  Incomes,  Chapter    IV. 

2  The  Theory  of  Earned  and  Unearned  Incomes,  Chapter  V,  S  i. 

(51) 


52  The  Taxation  oi^  Unearned  Incomes 

above  the  marginal  product  of  such  waiting  and  labor. 
Let  us  suppose  this  particular  piece  of  land  to  be  non- 
existent. Then  the  labor  and  capital  applied  upon  it 
must  needs  be  applied  on  poorer  or  less  well  situated  land 
not  previously  used,  or  this  labor  and  capital  must  be 
applied  to  using  more  intensively  land  already  in  use. 
Applied  in  either  of  these  ways,  such  labor  and  capital 
would  produce  $300  less  than  could  be  produced  if  the 
labor  and  capital  were  applied  to  the  $2,200  yielding  land. 
In  other  words,  the  $300  is  the  product  of  this  particular 
piece  of  unimproved  land  in  the  sense  that  the  existence 
and  use  of  this  piece  of  land  makes  it  possible  for  a  prod- 
uct $300  larger  *  to  be  secured  with  no  more  labor  and 
waiting,  simply  because  the  land  resources  to  which  the 
labor  and  waiting  are  applied  are  that  much  better  than 
the  margin  at  which  the  labor  and  waiting  in  question 
must  otherwise  be  applied.  But  although  $300  may  thus 
be  regarded  as  a  contribution  of  the  land  to  production, 
it  is  not  on  that  account  to  be  regarded  as  a  contribution 
of  the  landowner  to  production. 

It  is  to  be  emphasized  that  the  rent  of  city  land  is  de- 
termined in  just  the  same  way  as  the  rent  of  land  in  the 
country.  The  well-located  merchant  derives  a  larger  re- 
turn from  his  business  as  a  retailer  or  a  jobber  by  virtue 
of  his  superior  situation.       So,  also,  the  manufacturer 

4  By  way  of  qualification  it  may  be  said  that  this  differential  is 
not  fixed  but  is  greater  for  some  potential  users  of  the  land  than 
for  others.  Some  users  may  be  able  to  gain  from  the  use  of  a  piece 
of  superior  land  much  more  than  they  have  to  pay.  To  others,  the 
differential  is  less  than  the  rent  and  they  will  presumably  use  in- 
ferior land.  The  marginal  product  of  the  land  is  its  productivity 
to  the  user  who  is  just  induced  to  hire  it  and  who,  if  rent  were 
greater,  would  have  to  resort  to  poorer  land. 


Land  Rent  as  a  Marginal  Product  53 

whose  business  is  wisely  located  in  relation  to  sources  of 
power  and  to  shipping  facilities  derives  from  such  a  loca- 
tion advantages  for  which  he  may  be  willing,  if  necessary, 
to  pay  a  high  rent  and  for  which,  if  the  desired  location  is 
equally  advantageous  to  others,  he  will  have  to  pay  such 
a  rent.  In  the  case  of  either  country  or  city  land  it  is 
here  intended  to  regard  as  land  rent  only  the  amount 
which  is  the  marginal  product  of  the  land  as  such.  In- 
terest on  the  cost  of  improvements,  whether  swamp 
draining  and  fertilizing  in  the  case  of  farm  land  or  filling 
and  levelling  in  the  case  of  city  land,  is  not  properly  a 
part  of  the  rent  of  land  but  is  a  return  on  capital  in- 
vestment. 

The  amount  of  rent  which  landowners  can  get  for  the 
use  of  their  land  appears  to  be  pretty  definitely  fixed  by 
the  conditions  of  demand  and  supply.  Attention  is  com- 
monly called,  by  economists,  to  the  fact  thai  a  tax  on 
land  rent  can  not  be  shifted.  The  owner  of  the  land  can- 
not, when  a  tax  is  levied,  get  any  more  rent.  The  tax 
does  not  increase  the  marginal  product  of  the  land.  It 
does  not  decrease  the  marginal  product  of  waiting  or  the 
marginal  product  of  labor.  It  cannot  make  interest 
lower  or  wages  lower.  It  cannot,  therefore,  increase  the 
difference  between  the  total  product  of  the  land  and  the 
amount  going  to  capitalists  and  wage  earners.  It  does  not 
make  land  any  scarcer.  The  tax-paying  landowner  can 
even  less  afiford  to  keep  his  land  idle  than  the  landowner 
who  is  untaxed.  It  does  not  decrease  the  quantity  of 
goods  produ':ed  on  the  land  and  does  not  increase  prices. 
It  simply  leaves  the  landowner  with  a  smaller  income  by 
the  amoii*:t  of  the  tax  subtraction.  A  tax  on  interest 
might  diminish  saving  and  make  interest,  eventually, 
higher.     A  tax  on  wages,  especially  if  heavy,  might  di- 


54  The;  Taxation  o?  Unearne;d  Incomes 

minish  population  and  so  make  wages,  in  a  later  gen- 
eration, larger.^  But  a  tax  on  rent  can  have  no  effect 
other  than  to  diminish  the  amount  of  revenue  received 
by  landowners  and  give  this  revenue  to  the  general  public. 
It  should  be  said,  however,  by  way  of  qualification,  that 
when  the  rent  results  not  chiefly  from  a  favorable  situa- 
tion or  other  conditions  independent  of  the  owner's  labor 
but  in  part  from  a  fertility  which  has  to  be  maintained 
by  the  owner's  efforts,  some  shifting  may  take  place. 
(Return  on  improvements  due  to  labor  is  properly  inter- 
est on  capital.)  But  a  tax  upon  the  situation  rent  or 
value  of  land  falls  upon  the  owner  and  upon  no  one  else. 

§2 

Land  Rent  versus  Capital  Interest 

An  examination  of  the  justice  of  special  land-value 
taxation  may  advantageously  begin  with  a  brief  consid- 
eration of  the  difference  between  rent  and  interest.^ 
It  is  sometimes  said  that  the  rent  of  land  is  no  less 
interest  than  the  return  on  other  capital,  since  the  re- 
turn on  land  can  be  viewed  as  a  given  percentage  on 

5  This  suggests  the  Physiocratic  doctrine  that  all  taxes  musi  inev- 
itably be  borne  by  the  landed  proprietors  of  a  country,  through  di- 
minished population  and  lower  rents.  The  conclusion  may  be  (and 
may  not  be)  largely  true,  if  we  include  owners  of  urban,  etc.,  as 
well  as  agricultural  land,  as  the  Physiocrats  did  not.  But  a  tax 
on  wages  thus  shifted  to  landowners  will  fall  upon  them  in  very 
different  proportions  than  a  direct  tax  levied  as  a  percentage  of  rental 
value.  The  former  will  fall  much  more  heavily  in  proportion 
on  the  owners  of  near-marginal  land  and  the  latter  will  fall  with 
equal  proportionate  weight  on  the  owners  of  superior  land. 

^  This  and  the  following  paragraphs  of  this  section  appear  also 
in  I,  §  5,  but  are  repeated  here  because  of  their  relation  to  what  is 
to  follow. 


Land  Rent  versus  Capital  Interest  55 

a  given  valuation,  while  on  the  other  hand,  the  interest  on 
other  capital  can  be  viewed  as  an  absolute  amount  in 
dollars  per  machine  or  factory,  just  as  land  rent  is 
viewed  as  so  many  dollars  per  building  lot  or  per  acre 
a  year.'^  But  more  fundamentally  there  is  a  difference, 
despite  the  superficial  resemblance,  between  situation  rent 
and  capital  interest.  The  return  on  land  should  be  looked 
at  as  an  absolute  amount  measured  and  determined  by 
the  surplus  over  production  on  the  extensive  or  inten- 
sive margin.  It  is  not  determined  by  the  value  of  the 
land.  Neither  has  the  value  of  land  as  such,  i.  e.,  its 
situation  value  apart  from  improzTinciits,  any  relation  to 
any  cost  of  production,  since  the  land  was  not  humanly 
produced.  On  the  contrary,  the  value  of  the  land  can  be 
arrived  at  only  by  discounting  its  expected  future  rents 
or  returns  at  some  previously  found  rate  of  interest. 
Thus,  a  piece  of  land  which  would  yield  $5,000  per  year 
net  rent  (above  taxes,  wages  of  labor  employed,  interest 
on  the  capital  invested  in  buildings  and  other  improve- 
ments, and  insurance)  would  be  worth,  if  interest  were 
5  per  cent.,  $100,000.  Vv^ere  the  current  rate  10  per  cent., 
such  a  piece  of  land  would  be  worth  but  $50,000. 

With  equipment  of  the  producible  and  reproducible 
kind,  however,  the  relation  between  capital  and  income 
value  is  not  the  simple  one  above  outlined.  The  value  of 
such  capital,  though  not  unaffected  by  the  value  of  its  ex- 
pected services,  is  very  directly  related  to  the  cost  of 
its  production.  Buildings  of  a  type  costing  $5,000  each 
will  hardly  be  put  up  to  sell  for  much  less,  as  a  rule,  by 
the  builders.     Nor,  so  long  as  the  alternative  is  open  to 

■^  This  view  seems  to  be  presented  in  Fisher,  T/ie  Nature  of  Capital 
and  Income,  New  York  (Macmillan),  1906,  pp.  184-188. 


56  Thi;  Taxation  of  Unearned  Incomes 

him  of  supervising  the  construction  of  a  similar  building, 
will  a  possible  buyer  care  to  pay  a  great  deal  more.*  The 
value  of  a  building  is  determined  then,  in  large  part,  by 
the  expenses,  such  as  wages,  of  producing  the  materials 
and  of  putting  it  up ;  and  these  wages  are  determined,  in 
the  last  analysis,  by  the  existence  of  alternative  lines  of 
activity  open  to  the  wage-earners,  while  the  other  costs 
are  determined  by  the  alternative  uses  to  which  the 
land  or  capital  which  must  be  used  in  producing  the  ma- 
terials might  be  put. 

Since  the  value  of  produced  and  reproducible  capital 
is  thus  in  large  part  fixed  directly  by  its  cost  of  produc- 
tion, the  assertion  that  interest  is  in  large  part  deter- 
mined by  the  rate  of  productivity  of  capital  does  not  in- 
volve reasoning  in  a  circle.  Interest  is  5  per  cent,  be- 
cause, for  one  and  perhaps  the  most  important  reason, 
capital  worth  $10,000  will  produce  an  annual  net  in- 
come of  $500.  It  therefore  appears,  to  sum  up  our  con- 
clusions thus  far,  that  the  value  of  produced  capital  de- 
pends in  a  considerable  degree  on  cost  of  production,  that 
the  ratio  between  the  value  of  capital  and  its  income  is  an 
important  factor  in  determining  the  general  long-run  rate 
of  interest,  and  that  this  rate  of  interest  is  an  essential 
element  in  the  valuation  of  land. 

§  3 

La)id  Rent  as  an  Unearned  Income  ^ 
It  is  but  a  short  step  to  the  conclusion  that  the  accumu- 
lators of  produced  capital  may — and  in  many  cases  doubt- 

8  If  he  purchasers  a  building  already  constructed  he  pays,  in  its 
cost,  for  the  supervision  of  its  construction. 

^  This  section  is  in  part  repeated  from  I,  §  5,  because  of  the  bear- 
ing of  the  repeated  paragraphs  on  the  immediately  succeeding  discus- 
sion. 


Land  Rext  as  an  Unearned  Income  57 

less  do — add  to  the  value  of  the  annual  aggregate  in- 
come of  society  as  much  as  they  take  out  of  this  income 
in  interest ;  while  the  owners  of  land,  as  such,  contribute 
no  service  in  return  for  their  income.  Whereas,  in  the 
case  of  produced  capital,  the  public  (except  in  certain 
cases,  numerous  enough,  no  doubt,  where  the  capital  is 
wastefully  or  injuriously  used)  pays  the  owner  for  a 
service  which,  without  his  saving  (or  the  saving  of  some- 
one whose  right  to  payment  has  been  transferred  to  him), 
would  not  have  been  enjoyed,  in  the  case  of  land  the  pay- 
ment is  made  for  a  benefit  which  is  dependent  on  no  in- 
dividual's saving  or  effort  and  a  benefit  for  which,  there- 
fore, no  individual  is  responsible.  In  the  one  case  the 
community  pays  for  a  service  which  is  actually  rendered 
to  it.  In  the  other  case  it  pays  people  who  have,  in  the 
capacity  in  which  they  are  paid,  rendered  no  service. 

The  view  presented  so  consistently  in  this  book 
that  incomes  received  not  in  payment  for  service  ren- 
dered lack  social  justification  will  not,  of  course,  be  ac- 
cepted by  the  Junker  type  of  mind.  More  or  less  plausi- 
ble arguments  may  again  be  advanced  as  they  have  often 
been  before,  in  favor  of  incomes  to  privileged  classes. 
It  will  be  alleged  that  members  of  these  classes,  not  hav- 
ing to  worry  about  their  livelihood,  will  become  efficient 
officers  of  state,  scholars  devoted  to  research,  and,  in 
other  ways,  profitable  social  servants.  To  the  argument 
that  if  a  class  is  to  be  supported  without  definite  regard 
to  a  special  service  for  w^hich  their  income  is  received,  in 
order  that  such  results  may  accrue,  the  public  might  se- 


58  Thk  Taxation  op  Unearned  Incomes 

lect  in  a  better  way  the  individuals  who  should  make  up 
this  class,  it  will  doubtless  be  replied  that,  in  practice,  the 
public  will  not  select  in  any  such  manner  as  to  give 
equally  good  results.  Or  the  supporters  of  a  privileged 
aristocracy  may  go  a  step  farther  and  defend  its  exist- 
ence, not  by  virtue  of  any  alleged  superior  social  serv- 
ice, but  as  being  good  in  itself,  as  a  class  for  the  good 
of  which  other  classes  exist,  as  constituting  "the  back- 
bone of  the  state."  To  one  who  accepts  either  view  above 
outlined,  no  argument  against  exploitation  will  be  con- 
vincing, especially  if  the  exploitation  is  of  an  ancient  sort 
and  has  the  prescriptive  sanction  of  long  usage,  as  is  the 
case  with  land  rent. 

To  avoid  any  possible  misunderstanding,  let  it  be  em- 
phasized that  land  rent  as  here  defined  does  not  mean 
merely  the  sum  paid  by  a  tenant  to  an  owner,  for  the 
\   use  of  land,  but  equally  the  amount  received  by  the  per- 
/    son  who  himself  uses  his  own  land,  in  excess  of  wages  for 
^   his  labor  and  interest  on  his  capital.     This  rent  comes 
j   to  him  in  money  when  he  sells  the  goods  or  services  which 
^   the  land  prodvices.    He  is  paid,  thus,  by  others,  for  bene- 
fits which  not  he  but  the  land  renders.     The  community 
in  buying  from  him,  pays  him  for  more  than  the  service 
he  and  his  saving  render  them. 
\       But,  it  may  be  said,  at  least  many  of  the  present  land- 
owners are  persons  who  have  made  their  savings  from 
what  they  have  earned  and  have  chosen  to  invest  their 
savings  in  land  rather  than  elsewhere.     Have  they  not, 
in  their  savings,  given  the  community  as  much  value  as 
they  draw  in  rent?     The  answer  may  well  be  that  they 
have  given,  to  that  part  of  the  community  from  whom 
their  rent  income  is  derived,  nothing  whatever.     If  A, 
who  has  saved  $10,000,  uses  it  to  buy  a  piece  of  land 


Land  Rent  as  an  Unearned  Income  59 

from  B,  he  is  merely  paying  B  for  the  privilege,  pre- 
viously enjoyed  by  B,  of  receiving  rent  from  others  for 
the  use  of  something  that  neither  he  nor  any  other  in- 
dividual produced  and  the  use  of  which  would  be  equally 
available  had  no  owner  or  purchaser  of  land  ever  been 
born.  In  turn,  B  has  now  the  $10,000  of  accumulations 
and  it  is  quite  possible  that  he  may  use  it  in  some  way 
that  will  increase  the  annual  product  of  industry.  If  so, 
the  community,  or  some  members  of  the  community,  will 
come  to  be  paying  B,  in  interest  on  capital,  for  services 
which,  without  A's  saving,  would  not  have  been  available, 
while  they  will  be  paying  A,  in  rent,  for  benefits  from 
the  use  of  land,  which  are  not  due  to  any  individual's 
work  or  savings.  If,  before,  the  community  was  paying 
the  landowner  B  a  rent  while  getting  no  service  that 
could  fairly  be  regarded  as  coming  from  him,  now  it  is 
making  payments  to  both  A  and  B,  as  rent  and  interest 
respectively,  and  receiving  services  in  return  from  only 
one.  If,  before,  B  the  landowner  was  a  pensioner  to 
whom  the  community  gave  something  for  nothing,  now 
A  has  become  the  pensioner,  having  bought  out  B,  and 
is  receiving,  from  the  rest  of  the  community,  something 
for  nothing.  For  it  should  be  clearly  evident  that  the 
$10,000  paid  to  B  for  the  land  is  not  a  service  rendered 
to  C,  D,  or  E,  who  are  the  persons  that  have  to  pay  A  for 
the  use  of  the  land.  Yet  much  of  emphasis  is  commonly 
directed  to  the  assertion  that  the  land-using  part  of  the 
community  ought  to  pay  rent  to  landowners  because 
these  landowners  have  in  many  cases  paid  previous  land- 
owners for  the  land  and  despite  the  fact  that  none  of 
the  landowners  in  the  series  can  be  said  to  have  ren- 
dered any  service  to  those  from  whom  they  collect  rent 
payment.     In  other  words,  it  is  asserted  that  C,  D,  and 


60  The  Taxation  of  Unearned  Incomes 

E  ought  to  be  obliged  to  pay  A  for  no  service  rendered  by 
him  or  by  anyone,  simply  because  A  previously  paid 
$10,000,  not  to  C  or  D  or  E,  but  to  B.  Is  such  a  doc- 
trine good  utilitarianism?  Is  its  application  good  social 
policy  ? 

§4 

Improvements  by  Special  Assessments  and  the  Right  of 
Landozvners  to  a  Rental  Return 

Nevertheless,  to  assert  that  in  practice  the  landowner, 
as  such,  never  performs  any  service  for  vv^hich  he  is  en- 
titled to  a  return  in  payment  for  the  use  of  his  land  is 
going  too  far.  If  he  is  entitled  to  nothing  else,  he  is  usu- 
ally entitled  to  a  return  on  the  cost,  to  him,  of  improve- 
ments (such  as  cutting  through  and  paving  streets)  met 
by  special  assessments.  These  assessments  are  custom- 
arily made  on  all  owners  of  land  where  a  street  is  to  be 
put  through  or  paved,  on  the  theory  that  they  derive  a 
special  benefit  from  the  improvement,  a  theory  which  is 
generally  in  accord  with  the  facts.  It  would  seem  that 
there  is  much  the  same  reason  for  the  owners  of  land 
which  is,  in  effect,  improved  by  such  expenditures,  to 
meet  them  as  there  is  for  farmers  to  pay  the  cost  of 
fencing  and  manuring  their  own  land. 

That  the  benefit  of  this  street  building  (as  of  social 
growth)  goes  to  the  landowners  as  such,  and  not  to  the 
owners  of  buildings  on  the  land,  should  become  apparent 
when  it  is  realized  that  a  building,  apart  from  its  situa- 
tion, can  hardly  go  much  above  the  cost  of  putting  up  an- 
other like  it.  Suppose  two  building  lots  side  by  side, 
each  worth  $2,000.  On  one,  a  $5,000  house  is  put.  The 
other  stands  vacant.     If  the  building  of  a  street  or  the 


Improvements  by  Special  Assessments  61 

growth  of  the  community  makes  the  combined  house  and 
lot  worth  $9,000,  is  not  the  added  $2,000  an  increase  in 
the  value  of  the  land  ?  If  there  is  no  change  in  the  cost 
of  putting  up  such  a  house,  will  not  the  adjoining  land 
(on  which  an  exactly  similar  house  can  be  built  for 
$5,000,  to  sell,  with  the  lot,  for  $9,000)  immediately  come 
to  be  worth  $4,000?  A  house  or  other  building  unwisely 
located  where  it  cannot  be  used  may  come  to  have  less 
value  than  its  cost,  by  the  necessary  expense  of  moving 
it,  or,  if  it  is  not  movable  to  a  desirable  locality,  by  an 
indefinite  amount.  But  a  house,  as  such,  can  hardly  in- 
crease in  value  much  above  its  cost  of  duplication. 
Analysis  seems  to  show  that  the  increase  inheres  in  the 
site. 

If,  then,  on  the  basis  of  this  fact,  the  owner  of  land  is 
compelled  to  bear  the  cost,  or  most  of  the  cost,  of  the 
improvements  made,  it  seems  but  reasonable  that  he 
should  be  allowed  to  enjoy  some  return  on  his  investment 
in  the  expense  of  paving  or  other  improvement,  if  any 
such  return  is  forthcoming.  This  does  not  mean  that  he 
is  entitled  to  secure  all  the  value  that  results  from  so- 
cial growth,  or,  perhaps,  any  of  the  value  so  resulting,  but 
it  may  mean  that  he  should  be  regarded  as  the  owner 
of,  and  is  entitled  to  interest  on,  the  difference  between 
what  the  value  of  the  land  in  question  would  be  to  a 
prospective  purchaser  by  whom  the  costs  of  improvement 
had  still  to  be  met,  and  the  value  to  a  purchaser  after  such 
improvements  have  been  made.  In  short,  the  investor  is 
entitled  to  a  return — if  the  land  can  ever  be  made  to 
yield  it — on  the  expense  to  him  of  the  special  assess- 
ments. 

It  seems  clear  enough  to  the  writer  that  a  not  very  ex- 
cessive rate  on  such  expenditures  for  street-making,  etc., 


62  The  Taxation  of  Unearned  Incomes 

will  compensate  owners  on  the  average  for  any  risks  that 
their  land  may,  in  certain  contingencies  of  population- 
shifting,  yield  less  than  an  average  return  on  such  ex- 
penses. If,  however,  a  group  of  lot-owners  take  steps 
to  have  a  street  cut  through  long  before  there  is  need  of 
it  and  therefore  find  that  a  return  on  this  cost  cannot 
for  some  time  be  had,  it  does  not  follow  that  these  own- 
ers are  entitled  to  get,  out  of  the  increased  value  which 
later  may  result  from  social  growth,  all  the  interest  lost 
during  the  interval  of  waiting. 

That  the  value  of  city  land  usually  includes  more  than 
can  be  accounted  for  by  the  expense  of  such  improve- 
ments is  evident  if  we  call  to  mind  the  value  of  well- 
situated  land  where  such  local  improvements  have  not  yet 
been  made.  A  piece  of  land  in  a  great  city,  situated 
where  the  building  of  a  street  was  contemplated  but  not 
begun,  might  well  be  less  valuable  by  only  about  the 
cost  of  the  necessary  assessments  than  if  the  street  were 
there.  Without  doubt  it  is  sometimes  true  that  improve- 
ments such  as  street  construction  start  the  fashion  of  liv- 
ing in  a  given  section  of  a  city  and  so  bring  up  the  value 
of  sites  there  by  far  more  than  the  cost  of  the  improve- 
ments. But  it  is  also  true  that  the  outward  pressure  of 
population  or  the  building  of  a  railroad  or  trolley  line 
gives  value  to  the  unimproved  land  in  the  absence  of 
streets,  and  makes  the  putting  through  of  the  streets 
worth  while.  In  this  latter  case  the  causal  influence  runs 
the  opposite  way.  It  is  the  conditions  leading  to  in- 
creased value,  and  the  contingent  possibility  of  deriving 
from  the  land  an  income  previously  not  obtainable  even 
if  improvements  had  been  made,  that  give  rise  to  the 
street-cutting  movement. 


Other  Services  of  City  Landowners  63 

Our  conclusion  seems  to  be  that  owners  of  land  are 
entitled  to  a  return  on  their  investments  in  improve- 
ments, such  as  special  assessments  for  cutting  streets,  in 
the  same  sense  and  to  the  same  degree  that  they  are  en- 
titled to  a  return  on  the  cost  of  building  houses  or  fac- 
tories ;  that,  however,  they  are  no  more  entitled  to  a  so- 
cially guaranteed  return  in  the  one  case  than  in  the 
other ;"  and  that  there  is  no  reason  why  they  should  be 
allowed  more  than  enough,  on  the  basis  of  such  expendi- 
tures, to  make  the  expenditures  worth  while.  It  does  not 
follow  that  the  sums  required  as  special  assessments  or 
purposely  invested  by  land  speculators  in  street  building, 
etc.,  are  not  fairly  subject  to  tax  in  the  same  way  as  any 
property  is  subject  to  tax,  but  only  that  whatever  rea- 
sons there  may  be  for  special  taxation  of  land  values  in 
general  do  not  apply  to  the  part  of  land  values  clearly  due 
to  such  investments  any  more  than  they  apply  to  the 
part  of  farm  land  values  due  to  the  owners'  expendi- 
tures in   fertilization. 

§5 

Other  Services  of  City  Landowners 

Are  there  any  other  expenses  met  or  services  per- 
formed by  the  city  landowner  which  are  to  be  regarded 
from  the  viewpoint  of  the  land-value-taxation  philosophy 
as  entitling  him  to  some  exemptions?  Does  the  land- 
lord, for  instance,  perform  a  service  worthy  of  a  share 
of  economic  rent  by  "managing"  the  land?  Is  the  joint 
activity  of  landowners  in  a  given  section,  in  determining 

1°  Except  as  the  community  compels  them  to  make  improvements 
at  their  expense  in  advance  of  their  own  desire  to  do  so. 


64  The  Taxation  of  Unearned  Incomes 

the  class  or  race  of  tenants  who  may  live  in  such  a  sec- 
tion, or  attending  to  other  matters  of  common  interest, 
a  service  entitling  them  to  the  enjoyment  of  rent?  Some 
of  this  activity  or  attention  is  needed  only  when  the  land 
is  used  for  residential  purposes,  and  perhaps  might  be 
given,  under  some  arrangement  for  a  percentage  consent 
in  favor  of  new  residents,  by  tenants  instead  of  by  land- 
owners as  such,  or,  as  is  sometimes  the  case  in  a  limited 
degree,  by  municipal  ordinance.  The  desired  protection 
of  tenants  in  the  matter  of  neighbors  is  but  inadequately 
given  when  even  two  or  three  landlords,  by  departing 
from  a  general  understanding,  choose,  for  a  profit,  to  ad- 
mit undesirables  as  tenants  or  purchasers.  Municipal  pro- 
tection might  not,  in  a  democratic  community,  be  much 
better,  but  it  probably  would  not  be  much  worse.  At 
any  rate,  any  service  of  this  sort  yielded  by  landowners 
does  not  entitle  them  to  more  than  a  very  small  fraction 
of  the  annual  rent  of  the  land.  To  say  that  it  is  worth  all 
the  rent  in  every  case  is  to  say  that  it  is  worth  much  more 
in  a  metropolis  than  in  a  small  town.  And  to  say  that 
all  the  rent  is  earned  by  such  service  is  to  say  that  the 
cost  and  trouble  of  rendering  the  service  so  offsets  the 
rent  as  to  make  the  value  of  the  land  (the  amount  that 
a  purchaser  would  pay  for  the  future  enjoyment  of  the 
rent)  zero. 

Another  view  is  that  the  rent  of  land,  instead  of 
being,  aside  from  interest  on  special  assessments,  alto- 
gether an  unearned  income,  is  partly  a  compensation 
for  risk  and  a  stimulus  to  seek  out  and  bring  into  use 
desirable  locations.  In  such  a  view,  it  might  be  argued 
that  the  real  estate  dealers  who  develop  a  new  section 
of  a  city  or  a  city  suburb  for  residential  purposes  risk 
getting  but  an  inadequate  return ;  or  the  capital  put  into 


Other  Services  of  City  Landowners  65 

improvements  may  be,  if  the  new  section  proves  to  be 
wholly  unpopular,  entirely  lost.  Must  there  be  a  chance 
for  a  corresponding  gain  of  the  so-called  unearned-incre- 
ment variety  in  order  that  the  improvements  desired  shall 
be  made?^^  And  if  the  possibility  of  surplus  gain  needs 
to  be  kept  open  to  the  land  speculator,  must  this  gain  in- 
clude all  the  rental  value  of  the  land  for  all  future  time  ? 
Is  the  fact  that  a  given  speculator  foresaw,  earlier  than 
others,  the  possibility  of  developing  certain  sites,  and  thus 
hastened  the  flow  of  business  or  population  to  them,  a 
reason  why  later  generations  of  business  people  or  of 
residents  to  whom  the  early  bringing  into  use  of  the 
land  is  no  advantage,  should  have  to  pay  him  for  the 
privilege  of  working  or  living  on  it?  Of  what  service  is 
such  earlier  development  to  these  later  generations,  that 
they  should  have  to  pay  an  extra  rent  for  the  space  used, 
in  order  to  compensate  for  an  early  risk  of  loss,  land- 
owners or  the  descendants  of  landowners  who  took  risk 
by,  possibly,  premature  building  in  a  new  section?  So 
long  as  this  section  is  now  built  up  and  available  for 
business  or  residence,  its  having  been  built  long  before 
their  use  of  it  is  probably  of  no  advantage  to  present 
users.  If  these  present  users  must  pay  more  in  conse- 
quence of  such  early  development,  the  landowner  is  pre- 
sumably receiving  payment  from  persons  to  whom  nei- 
ther he  nor  his  predecessors  have,  as  landowners,  ren- 
dered a  corresponding  service. 

In  the  case  of  inventions  and  patents,  we  limit  the  time 
during  which  the  inventor  is  to  enjoy  a  special  profit  on 
his   idea,   our   philosophy   being — partly,   at   least — that 

11  Cf.  Hadley,  Economics,  New  York  (Putman),  1896,  pp.  287- 
291. 


66  The  Taxation  of  Unearned  Incomes 

after  a  few  years  the  general  progress  of  knowledge 
would  be  likely  to  bring  the  essential  idea  involved  to 
someone  else  or  to  several,  and  that  the  general  public 
or  that  part  of  the  public  using  the  invention  cannot  be 
regarded  as  perpetually  indebted  to  the  patentee.  May 
not  the  discovering  of,  and  the  calling  of  the  community's 
attention  to,  the  value  of  new  sites  (and  likewise  of  new 
mines,  etc.)  be  a  service  of  this  limited  kind?  Can  it 
be  supposed  that  the  residents  of  a  city  would  forever, 
and  despite  increase  of  numbers,  be  indifferent  to  the  ad- 
vantages of  living  in  "Hillcrest,"  "Riverview,"  "Country- 
side," or  "Eastville"?  For  how  many  generations  must 
the  public  pay  the  descendants  of,  or  the  purchasers  of 
land  from,  those  who  first  emphasized  or  advertised  the 
advantages  of  these  sections  for  the  service  of  thus  ad- 
vertising them  ?  It  is,  indeed,  quite  possible  that  the  land 
speculators  who  first,  by  their  advertising,  induced  pop- 
ulation to  move  into  a  new  section,  have  sometimes  per- 
formed a  disservice  rather  than  a  service,  by  unduly  has- 
tening a  movement  which  would  have  normally  come 
somewhat  later. 

Another  point  sometimes  emphasized  in  the  case  of 
patents  is  that  a  limited  period  of  special  profit  is  enough 
to  induce  the  invention  and  its  exploitation.  It  is  un- 
necessary, therefore,  to  make  the  public  pay  this  excess 
profit  forever.  May  not  the  same  conclusion  apply  in  the 
case  of  the  service  of  landowners  in  calling  attention  to 
the  advantages  of  special  sites? 

A  parallel  argument  applies  in  the  case  of  mines,  oil 
wells  and  power  sites.  It  is  unreasonable  to  suppose 
either  that  resources  of  these  sorts  would  never  be  dis- 
covered except  by  the  individuals  who  first  happen  upon 
them,  or  that  it  is  necessary,  in  order  to  get  them  discov- 


Settlivment  of  Western  Land  67 

ered  and  used,  to  grant  the  discoverers  the  entire  rental 
value  of  them  so  long  as  they  are  used. 

Even  if  we  should  decide  that  this  particular  kind  of 
service  was  of  no  value  and  that  we  did  not  wish  popu- 
lation or  business  location  to  be  affected  by  the  activi- 
ties of  land  speculators,  and  even  if,  therefore,  we  al- 
lowed no  part  of  the  rental  value  of  land  to  go  into 
private  hands  to  pay  for  such  services,  there  would  need 
to  be  no  fear  that  houses  and  other  structures  would  not 
be  built.  Obviously,  a  certain  intensity  of  demand  and 
willingness  to  pay  rent  for  houses,  etc.,  on  the  part  of 
tenants,  would  yield  a  sufficient  average  return  on  the 
cost  of  building  to  make  investors  willing  to  take  the  risk 
of  building  in  places  where  there  was  reasonable  proba- 
bility of  the  use  of  the  houses,  and  this  without  any 
prospect  of  realization  of  situation  rent  as  an  offset  to 
possibilities  of  loss. 

While  we  are  on  this  general  topic,  one  point  should 
be  particularly  emphasized,  viz.,  that  foresight,  purely  as 
such,  deserves  nothing  whatever.  The  man  who,  fore- 
seeing a  rise  in  certain  land  values  from  a  probable  in- 
crease in,  or  shift  of,  population,  puts  himself  in  a 
strategic  position  to  profit  by  it,  is  not  thereby  rendering 
any  service  to  those  from  whom  he  derives  return.  Fore- 
sight used  to  give  a  service  may  earn  remuneration.  Fore- 
sight used  to  get  something  for  nothing  seems  hardly  de- 
serving of  any  special  protection. 


The  Increment  of  Land  Values  in  Relation  to  the  Settle- 
ment of  the  American  West 

The  expectation  of  an  increase  of  land  values,  consid- 
ered as  an  inducement  to  bringing  new  land  into  use,  has 


68  The  Taxation  oi^  Unearned  Incomes 

sometimes  been  brought  up  in  connection  with  the  settle- 
ment of  the  West.  It  has  been  asserted,  for  example, 
that  the  lure  of  the  "unearned  increment"  was  instru- 
mental in  inducing  the  settlement  of  the  West.^^  It  has 
also  been  argued,  in  the  same  connection,  that  the 
stimulus  to  settlement  of  the  West  and  its  earlier  settle- 
ment because  of  this  prospect  of  an  increasing  value  of 
the  land,  benefited  not  only  the  settlers,  but  also  those  who 
remained  East,  and  that,  therefore,  the  unearned  incre- 
ment was  "diffused"  throughout  the  country.^^  Many 
have  doubtless  drawn  from  this  contention  the  conclu- 
sion that  the  descendants  of  the  early  settlers  in  the 
West  are  clearly  entitled  to  any  increase  that  may  have 
come  to  the  value  of  their  land,  even  when  cities  have 
grown  up  on  or  near  it  and  their  descendants  have  been 
able  to  retire  and  live  as  landed  aristocrats,  leaving  to 
others  not  so  fortunate  the  occupation  of  agriculture  in 
which  their  fathers  were  wont  to  engage.  The  argu- 
ment regarding  the  diffusion  of  the  increment  is  based 
upon  the  belief  that  the  prospect  of  rising  land  values,  by 
inducing  a  movement  of  the  labor  supply  westward  and 
its  settlement  upon  the  farms,  prevented  the  labor  con- 
gestion in  the  East,  in  the  cities,  and  even  in  the  agri- 
cultural West  from  being  as  great  as  it  might  otherwise 
have  become.  Hence,  it  can  be  argued,  the  settlement  of 
the  West  prevented  the  (marginal)  product  of  labor 
from  being  so  small  and  wages  from  being  so  low,  in 
the  East  and  elsewhere,  as  might  otherwise  have  been 
the  case. 

12  See  J.  B.  Clark,  The  Distribution  of  Wealth,  New  York   (Mac- 
millan),  1899,  pp.  85-87. 

13  Ibid. 


Settlement  of  Western  Land  69 

But  may  we  not,  in  some  degree,  question  the  con- 
clusion that  an  unearned  increment,  or  any  substantial 
amount  of  it,  was  necessary  to  get  the  West  settled? 
After  all,  relatively  few  of  the  settlers  were  fortunate 
enough  to  take  up  land  which  afterward  became  part  of 
the  sites  of  cities  and  it  is  probable  that  most  of  them 
did  not  seriously  expect  such  fortune.  May  we  not  con- 
clude that,  for  the  most  part,  they  might  have  been 
willing,  for  the  possibility  of  enjoying  homes  where  the 
(marginal)  product  of  their  labor  gave  promise  of  be- 
ing high  to  go  and  take  up  new  land  even  though  the 
value  of  the  bare  land,  as  such,  could  not  be  expected 
greatly  to  increase  ?  It  is  those  who,  thus,  did  not  great- 
ly profit  from  rising  land  values,  whose  sons  and  grand- 
sons are  now,  presumably,  working  farmers  and  not  land- 
ed gentry. 

But  if,  as  some  economists  assert,  the  prospect  of  an 
increasing  land  value  was  an  essential  part  of  the  invi- 
tation of  the  West,  then  the  question  arises  whether  set- 
tlement was  hastened,  to  the  temporary  economic  loss 
of  those  who  went  first  and  to  the  later  loss  (through 
rent  payments)  of  those  who  followed,  and  whether  a 
more  gradual  spreading  of  population  westward,  when 
a  real  need  rather  than  an  artificial  inducement  began 
to  operate,  would  not  have  been  economically  better.^* 

As  to  the  question  whether  the  early  comers  or  their 
descendants  are  entitled  to  rent  compensation  for  being 
earliest  because  of  any  service  that  they  thus  rendered, 
we  must  bear  in  mind  that  any  such  compensation,  under 

"Cf.  Professor  H.  J.  Davenport's  article  entitled  "Theoretical 
Issues  in  the  Single  Tax,"  in  the  American  Economic  Revieiv,  March, 
1917,  especially  pp.  22-26. 


70  The  Taxation  oe  Unearned  Incomes 

our  present  land  system,  does  not  come  from  those  east- 
erners whose  wages  are  conceivably  higher  because  of 
the  drawing  ofif  of  surplus  population  to  the  West.  Nor 
will  it  probably  come,  for  the  most  part,  from  wage- 
earners  in  the  West  whose  wages  have  been  made  high- 
er by  the  movement  to  the  land  so  stimulated  by  the 
prospect  of  securing  a  profit  from  its  appreciation.  Un- 
der the  present  land  system,  the  rental  compensation  to 
wealthy  western  landowners  comes  from  people  living 
in  the  West,  and  mostly  from  people  who  came  a  little 
too  late  to  get  land  for  themselves,  or,  in  some  cases, 
from  people  who  had  other  ambitions.  It  is  these  people 
whose  coming  and  whose  demand  for  the  use  of  the  land 
bid  up  land  rents.  To  them,  as  persons  who  have  come 
to  be  inhabitants  of  the  West,  any  artificially  induced 
scarcity  of  labor  in  the  East  is  no  longer — if,  perchance, 
it  once  was — an  advantage.  Their  wages  are  not  higher, 
but  are  perhaps  lower,  in  the  long  run,  than  if  the  West 
were  less  completely  settled.  For  the  (marginal)  prod- 
uct of  western  labor,  if  not  less,  is  almost  certainly  not 
greater.  The  old  alternative  of  taking  up  new  and 
good  land  is  gone.  Of  course,  so  long  as  there  was 
still  other  new  and  good  land  to  be  had,  even  western 
wages  must  have  been  kept  up  by  the  rush  of  labor  to 
this  land,  but  this  would  not  continue  to  be  the  case  as 
the  land  filled  up  and  as  the  available  free  land  be- 
came progressively  poorer. ^^ 

In  what  sense,  then,  and  how  far,  were  the  benefits  of 
rising  land  values  difi;used  ?    Was  it  in  such  a  sense  that 

1^  Furthermore,  the  consequent  inflow  of  new  labor  from  the 
East  and  of  immigrant  labor  into  both  East  and  West  tended,  by 
rapidly  filling  any  vacuum,  to  prevent  any  considerable  realization 
of  such  a  gain  in  wages. 


SettivEment  oe  Western  Land  71 

the  descendants  of  those  who  did  not  take  up  land 
must,  in  justice,  pay  the  descendants  of  those  who 
did,  for  the  privilege  of  living  and  working  on 
it?  Are  the  descendants  of  those  who  did  not 
acquire  the  land  to  be  regarded  as  having  so  gained 
from  the  possibly  slightly  larger  labor  incomes  of  their 
grandfathers,  or  to  have  so  lent  their  moral  sanction  to 
the  system,  as  to  be  under  obligation  not  to  change  it, 
even  where  cities  have  grown  up  and  have  made  land 
which  was  worth  its  hundreds  of  dollars  now  worth 
millions?  Is  it  their  social  duty  to  go  on  paying  in- 
definitely for  the  use  of  land  which  would  be  equally 
available  and  which  would  be  about  equally  desirable  if 
any  individual  owner  to  whom  or  to  whose  descendants 
the  payments  for  its  use  are  made  had  never  lived?  Or 
can  society  in  general  be  regarded  as  having  ever  even 
impliedly  pledged  itself  that  the  increase  in  land  values 
resulting  from  social  growth  should  go  entirely  to  in- 
dividuals and  should  not  be  subject  to  any  considerable 
taxation  by  states  or  cities? 

Is  it  not,  indeed,  clear  that  we  are  very  definitely  main- 
taining a  land  system  which  makes  part  of  the  public 
pay  large  sums  annually  to  the  rest  of  the  public  for 
no  service  that  the  recipients  of  these  sums,  or  their  an- 
cestors, or  any  other  landowners  as  such  have  ever  ren- 
dered to  the  persons  from  whom  their  rental  incomes 
are  derived?  Why  are  those  who  thus  pay  without  get- 
ting, under  an  obligation  to  maintain  the  system  and  to 
continue  paying  through  all  future  time?  Must  count- 
less generations  of  the  disinherited  be  held  under  obliga- 
tion to  pay  for  a  somewhat  problematical  "diffusion"  ben- 
efiting some  of  their  ancestors,  a  diffusion  from  which 


72  The;  Taxation  of  Unkarnrd  Incomes 

most  of  the  descendants  of  those  who  may  thus  have 
somewhat  benefited  have  very  hkely  reaHzed  nothing 
whatever?  We  do  not  allow  the  creditors  of  a  father  to 
require  payment  for  the  father's  debts  from  the  labor  in- 
come of  a  son,  however  much  the  father  may  have  gained 
— in  his  lifetime — by  his  borrowing,  nor  do  we  insist  on 
"compensation"  to  a  creditor  who  is  therefore  unable  to 
recover.  We  adhere  to  this  policy  because  we  do  not  con- 
sider it  socially  desirable  to  make  one  class  partially  the 
slaves  of  another  class,  to  compel  them  to  spend  part 
of  their  time  working  for  that  other  class  without  re- 
turn from  the  latter,  even  though  the  latter  class  may 
conceivably  have  rendered  a  real  service  to  the  ancestors 
of  the  class  that  pays.  May  it  not  be  as  much  contrary 
to  good  public  policy  to  recognize  any  implied  contract 
by  which,  as  an  offset  to  the  possibly  temporarily  larger 
incomes  of  one  class,  the  descendants  of  that  class  have 
to  pay  others  for  the  use  of  the  earth  ?  Is  not  the  recog- 
nition of  any  such  implied  contract  equivalent  to  recog- 
nizing the  right  of  men  to  sell  their  children  or  their 
grandchildren  into  slavery  ?  We  would  not  recognize  the 
latter  right,  in  our  society,  directly  and  avowedly,  even 
if  the  children  were  sold  to  get  food  to  save  their  lives. 
Must  we  recognize  the  former?  It  is  true  that,  in  the 
case  of  land  rent,  we  associate  the  payment  made  with 
a  material  thing,  the  land,  but  are  we  not,  nevertheless,  in 
essence,  dealing  with  a  payment  for  which  no  service  is 
rendered  ? 

If  it  is  said  that  the  western  homesteaders  sometimes 
had  to  fight  the  Indians,  it  can  also  be  said  that  they 
frequently  and  largely  received  protection  from  the 
United  States  army  paid  for  out  of  the  general  tax  fund; 
and  it  may  well  be  that  men  who  served  in  the  army  and 


Settlement  of  Western  Land  IZ 

gave  such  protection,  or  men  who  contributed  in  taxes  to 
maintain  it,  afterward  came  to  have  to  pay,  for  the  use 
of  land,  persons  so  protected.  It  is  to  be  questioned 
.whether  any  service  of  the  pioneers,  still  less  of  the 
droves  of  later  settlers,  who  followed  them  while  the 
land  was  still  cheap,  was  so  important  and  far-reaching 
that  the  descendants  of  the  more  fortunate  ones  can  be 
held  to  have  acquired  a  right  to  receive  tribute  for  all 
future  time  because  of  this  service,  and  that  the  millions 
of  dollars  of  situation  rent  in  the  cities  of  Chicago,  St. 
Louis,  Denver,  Los  Angeles,  and  San  Francisco  really 
all  represent  legitimate  payment  from  later  comers  and 
their  descendants  for  the  equivalent  services  to  these  later 
comers  and  their  descendants,  of  those  who  chose  to  come 
first.  Surely,  one  who  holds  this  needs  take  but  a  short 
step  farther  to  prove  that  the  whole  idea  of  the  unearned 
increment  is  a  myth,  or  the  product  of  diseased  imagina- 
tion, and  that,  really,  anything  that  anyone  gets  is  earned 
by  equivalent  service  to  the  one  who  pays  it. 

A  qualification  of  society's  right  to  land  rent  should  be 
made  in  the  case  of  a  country  the  population  of  which 
has  increased  or  is  increasing  beyond  the  point  of  maxi- 
mum per  capita  production.  In  such  a  country  there  may 
be  many  families  who  have  each  enough  land  for  the 
most  efficient  application  of  their  own  labor  and  for  com- 
fortable subsistence  and  who,  by  limitation  of  offspring, 
are  preventing  the  undue  subdivision  of  such  land  into 
small  plots — who  are  doing  their  share  in  keeping  up  the 
general  level  of  comfort  by  trying  to  prevent  too  great  an 
increase  of  population  in  relation  to  available  land.  If 
the  rest  of  the  nation  multiplies  quite  without  re- 
gard to  natural  resources  or  land  space  and  so  forces 
down  the  wages  of  labor  production,  society's  right  to 


74  The;  Taxation  of  Unearned  Incomes 

land  space  will  scarcely  justify  re-dividing  the  land  equal- 
ly, thus  directly  depriving  the  families  which  have  kept 
down  their  numbers  of  the  standard  of  comfort  which 
would  naturally  result  from  their  low  birth-rate.  Nor 
will  this  right  of  society  justify  a  system  of  taxation 
of  rental  values  which  indirectly  accomplishes  the  same 
result.  For  it  should  be  clear  that  if  the  land  so  held 
by  individual  families  comes  to  be  more  valuable,  not  by 
virtue  of  its  yielding  more,  but  solely  because  pressure 
of  population  increases  the  demand  for  it,  then  to  take 
all  of  the  greater  annual  value  in  taxation  may  leave  less 
to  the  owners  than  they  could  previously  fairly  earn. 
To  express  differently  the  same  thought ;  if  the  policy 
of  state  appropriation  of  land  rent  is  consistently  applied, 
so  that  individuals  get  only  the  earnings  of  their  other 
capital  and  the  wages  of  their  labor  (employed  or  self- 
directed),  then  an  increase  of  population  which  lowers 
the  productiveness  of  labor  will  not  only  enable  the  state 
to  collect  more  than  previously  from  individual  landown- 
ers, but  will  leave  less  to  them  as  individuals  and  families 
than  before.  Such  an  increase  of  population  will  then  leave 
less  than  before  even  to  those  families  which  are  in  no 
way  responsible  for  the  population  increase  from  which 
flows  their  new  family  poverty.  For  this  reason, — viz., 
because  it  would  remove  a  stimulus  to  desirable  limita- 
tion of  offspring,  because  it  would  penalize  the  far-see- 
ing, because  it  would  give  to  families  whose  ideals  tend 
toward  universal  misery  the  inheritance  of  those  fami- 
lies whose  self-imposed  limitation  of  numbers  certainly 
does  not  decrease  the  amount  of  land  available  for  the 
rest  of  society  and  whose  ideals,  if  generally  adhered  to, 
would  bring  universal  plenty — such  an  appropriation  of 
all  rental  values  of  land  might  not  be  a  desirable  social 


SeITTlement  of  Western  Land  75 

policy.  Part  of  the  rental  value  of  land,  even  of  agricul- 
tural land.held  by  actual  cultivators,  may  fairly  be  taken, 
but  not,  in  crowded  countries,  all. 

However,  in  practice  the  increase  of  land  values  is  us- 
ually in  large  part  an  increase  in  the  value  of  special 
sections  of  land  which  growth  of  population  causes  to 
become  more  advantageously  situated  in  one  or  more 
M^ays.  As  the  country  grows,  certain  places  come  to 
have  new  and  special  advantages  as  market  centers,  as 
ports,  etc.,  and  thus  acquire  an  increased  rental  value  not 
dependent  on  a  lowering  of  the  margin  of  production. 
Increase  of  population  in  a  fertile,  unsettled  plain,  con- 
taining a  great  deal  of  land  of  approximately  the  same 
fertility,  might  not  for  many  years  lower  the  marginal 
product  of  labor.  To  be  sure  the  later  settlers 
might  have  to  go  farther,  but  the  more  distant  points 
would  be  no  more  isolated  than  the  first-taken  land  was 
at  an  earlier  date,  and  the  extension  of  roads  and  rail- 
roads might  make  them  less  so.  Rent  would  rise,  not  be- 
cause the  margin  has  become  lower,  but  because  the 
situation  of  a  part  of  the  land  relatively  to  markets,  pop- 
ulation centers,  etc.,  has  become  better.  Still  more  clearly 
does  this  fact  stand  out  when  at  some  point  on  the  plain 
a  city  develops,  called  into  existence  by  the  increasing 
number  of  those  whom  its  merchants,  artisans,  et  al.,  can 
effectively  serve.  Its  growth  is,  possibly,  an  advantage 
even  to  the  owners  of  marginal  land,  but  confers  a  spe- 
cial advantage  on  those  whose  near-by  location  enables 
them  to  reap  exceptional  profit  from  supplying  the  city 
needs  as  to  produce.  The  growth  of  the  city  confers  a 
still  greater  advantage  on  those  whose  land  comes  to 
have  value  for  distinctly  urban  uses.  The  occasional  set- 
tler who  or  whose  descendant  finds  that  his  land  is  in 


7^         The  Taxation  of  Unearned  Incomes 

the  center  of  a  thriving  city  may  become  a  milhonaire  as 
a  consequence  of  conditions  to  which  his  own  contribution 
was  neghgible  if  anything  at  all.  In  this  case  and,  in 
general,  in  a  country  like  the  United  States,  land  rent  has 
probably  grown  much  more  largely  by  the  increase  of  the 
possibilities  of  special,  often  supra-marginal,  land,  thus 
creating  a  differential  between  it  and  marginal  land,  than 
by  forcing  cultivation  to  a  lower  margin.  Hence,  any 
desire  that  we  may  feel  to  protect  small  landholders  who 
limit  their  families  from  being  made  to  suffer  through 
the  general  increase  of  population,  need  not  prevent 
us  from  taking,  in  taxation,  most  of  the  rental  value  of 
land,  including  that  of  mines  and  power  sites,  and  nearly 
all  of  the  rental  value  flowing  from  its  situation  of  city 
land. 

§  7 

The  Bearing  of  the  Contention  that  there  may  he  Other 

Unearned  Incomes  Not  Especially  Associated 

with  Land 

It  has  sometimes  been  pointed  out,  by  way  of  objection 
to  the  single-tax  proposal,  that  land  rent  is  not  the  only 
income  which  is  of  the  nature  of  an  unearned  differen- 
tial. Sometimes  the  incomes  of  genius  in  excess  of  what 
persons  of  ordinary  ability  can  secure  are  presented  as  an 
analogous  case.  Whatever  may  be,  in  some  respects,  the 
degree  of  likeness,  the  two  cases  certainly  are  not  alike  in 
all  respects.  Thus,  it  may  not  be  equally  possible  to  tax 
largely  and  successfully  the  incomes  resulting  from  the 
exercise  of  genius,  as  to  tax  land  rent,  for,  in  the  case 
of  the  large  incomes  of  the  exceptionally  gifted,  the  at- 
tempt to  tax  them  heavily  might  conceivably  discourage 


Other  Alleged  Unearned  Incomes  17 

effort  and  cause  the  former  recipients  of  these  incomes  to 
be  satisfied  with  smaller — and,  therefore,  untaxed — re- 
turns. Taxation  of  the  rental  value  of  land,  however,  if 
based  upon  such  general  considerations  as  the  evident 
yield  of  neighboring  sites  and  the  apparent  market  value 
of  the  land  to  be  taxed,  i.  e.,  if  the  tax  is  not  made  larger 
because  an  efficient  producer  or  business  man  gets  more 
from  his  land  than  others  could  get,  would  probably  in 
no  wise  affect  the  owner's  choice  of  uses  for  the  land  or 
his  intensity  of  use  of  it  or  the  efficiency  of  his  use  of 
it.  Having  a  tax  to  pay  which  was  independent  of  his 
efficiency,  he  would  be  just  as  eager  to  earn  the  maxi- 
mum income  out  of  which  to  pay  the  tax  as  he  would  be 
to  earn  the  maximum  income  if  he  were  not  taxed. 

Indeed,  the  levying  of  a  tax  upon  the  potential  situation 
rent  of  land,  whether  actually  received  or  not,  would 
discourage  the  speculative  holding  of  land  out  of  use 
and  so  would  operate  to  prevent  the  forcing  up  of  rent 
by  any  scarcity  of  available  land  induced  by  such  specu- 
lative holding. 

Economists  whose  class  sympathy  (of  the  influence  of 
which  they  are  not  always  conscious)  or  whose  training 
by  their  former  teachers,  incapacitates  them  for  seeing 
any  distinction  between  land  and  capital  and  predisposes 
them  to  accept  superficial  resemblances  as  a  conclusive 
defense,  are  fond  of  saying  that  other  values  than  land 
values  are  enhanced  by  social  forces.  It  is  true  enough 
that  dress  suits  are  likely  to  have  less  salable  value  in  the 
Ozark  Mountains  than  in  the  centers  of  wealth  and  fash- 
ion and  that  a  twenty-story  office  building  is  worth  more 
in  New  York  City  than  in  a  country  village.  Neverthe- 
less, cases  of  monopoly  excepted,  it  can  hardly  be  denied 
that,  year  in  and  year  out,  produced  goods  cannot  be 


78  The;  Taxation  of*  Unearned  Incomes 

sold  anywhere  for  much  more  or  much  less  than  the 
cost  of  producing  them  in  the  places  where  they  are  to 
be  sold.  An  occasional  dress  suit  may  have  to  be  sold  at 
a  sacrifice  in  the  Ozarks,  and  a  building  too  large  for  the 
needs  to  be  met  may  prove  to  have  been  a  mistaken  in- 
vestment in  the  country  village.  But  as  a  general  rule 
dress  suits  will  not  be  produced  in  or  transported  to  the 
Ozarks  except  as  the  anticipated  price  covers  costs,  nor 
will  skyscrapers  be  regularly  built  to  sell  for  less  than  a 
return  which  seems  reasonable  in  relation  to  building  ex- 
penses. And,  on  the  other  hand,  where  competition 
is  active  and  is  carried  on  fairly,  the  prices  of  goods 
which  have  to  be  humanly  produced  cannot  go  much 
above  costs.  Even  making  all  possible  qualifications  for 
cases  of  obsolescence  and  for  changing  conditions  of  pro- 
duction, can  anyone  say  that  cost  is  really  an  element  of 
corresponding  significance  in  the  case  of  land  rent? 

Again,  it  may  be  said  that  there  is  possible  no  large 
remuneration,  in  a  sparsely  settled  primitive  community, 
for  the  person  gifted  with  an  exceptional  voice  or  other 
highly  specialized  talent.  But  neither  is  so  large  a  serv- 
ice possible  in  return  for  the  remuneration.  When 
such  remuneration  is  received  it  is  in  return  for  an  equiv- 
alent service  rendered  by  the  person  who  receives  it,  and 
this  is  not  the  case  with  the  situation  rent  of  land.  May 
not  considerations  of  eugenics  as  well  as  of  efficiency 
in  service,  apply  differently  to  the  proposition  to  tax  such 
incomes  than  to  the  proposition  to  tax  land  rent? 

Furthermore,  some  of  the  incomes  which  are  often 
thought  of  as  unearned  are  chance  gains  so  offset  by  cor- 
responding deficiencies  of  incomes  at  other  times,  as  to 
mean  no  average  loss  to  the  public.  If  the  failure  of  the 
Argentine  wheat  crop  may  unexpectedly  give  to  Ameri- 


Other  Alleged  Unearned  Incomes  79 

can  farmers,  grain  dealers  and  millers  a  higher  return 
than  was  contemplated  when  they  made  their  expendi- 
tures for  seed,  labor  or  grain;  so,  also,  an  unexpectedly 
large  crop  of  wheat  in  Argentina,  Canada,  or  elsewhere, 
may  compel  the  same  persons  to  accept  prices  which 
fall  far  short  of  compensating  them  for  the  expenditures 
and  effort  undergone.  The  general  public  is  likely  to 
gain  in  the  latter  case  as  much  as  it  loses  in  the  former. 
But  the  general  public  never  gains  from  an  unexpected 
fall  in  the  rental  value  of  land  except  in  the  sense  that 
the  public  is  then  less  exploited  than  before.  It  continues 
to  be  exploited,  though  in  a  smaller  degree.  There  is  lit- 
tle point  to  an  attempt  at  equating  continuous  exploita- 
tion varying  in  degree,  with  occasional  excess  pay  for 
service  which  is  likely  at  other  times  to  be  underpaid. 
It  will  be  worth  while,  here,  to  emphasize  the  fact 
that  land  rent  involves  exploitation  when  the  land  is 
used  in  socially  desirable  ways  as  well  as  when  it  is  used 
anti-socially.  In  the  latter  case,  payment  is  made  for  a 
disservice.  But  even  in  the  former  case  payment  is  made 
for  a  zero  service  or  for  a  service  less  than  equivalent 
to  the  rent.  Where  wages  of  labor,  interest  on  capital 
or  rent  on  land  are  secured  by  activities  or  by  uses  of 
property  which  definitely  injure  the  general  well-being, 
which  are  anti-social,  these  activities  or  uses  should  be 
prohibited  rather  than  that  men  should  be  allowed  thus 
to  secure  wealth  which  society  afterwards  taxes.  When 
a  business  concern  by  means  of  unfair  competition,  e.  g., 
by  misrepresentation  of  competitors'  goods  or  by  securing 
discriminating  rates  on  the  railroads,^"  succeeds  in  get- 

^^  See,  for  a  fuller  discussion  along  this  line,  the  author's  Principles 
of  Commerce,  New  York  (Macmillan),  1916,  Part  III,  Chapter 
VII,  §  4- 


80  The;  Taxation  oif  Unearned  Incomes 

ting  extra  profits  which  its  rivals  do  not  get,  or,  being 
able  to  undersell  the  rivals  discriminated  against,  gets 
business  which  would  otherwise  go  to  them,  we  have  a 
clear  case  of  unearned  income  resulting  from  anti-social 
activity.  Success  is  made  to  depend,  not  on  superior 
service,  not  on  superior  efficiency  in  economizing  labor, 
but  on  the  ability  to  exclude  rivals  from  the  market  even 
if,  as  may  well  happen,  these  rivals  are  much  more  effi- 
cient in  the  proper  business  of  both  or  all.  The  public 
cannot  afford  to  let  the  principle  become  established 
that  success  and  wealth  may  be  gained  by  such  methods. 
In  the  long  run,  consumers  must  expect  to  suffer  unless 
competition  of  this  sort  is  effectively  forbidden.  So,  too, 
in  the  case  of  monopoly,  which  gives  more  than  an  ordi- 
nary return  to  effort  or  to  the  users  of  capital  or  land, 
it  is  the  consumers  of  the  monopolized  article  or  articles 
who  are  entitled  to  relief  since  it  is  they  alone  who 
are  exploited.^''    In  general,  industrial  free-booting  should 

1^  No  opinion  is  here  expressed  regarding  the  relative  desira- 
bility, from  the  viewpoint  of  preventing  high  monopoly  prices 
to  consumers,  of  public  regulation  and  of  public  operation  of  in- 
dustries which  have  to  be  or  ought  to  be  of  monopoly  size.  But  if 
public  operation  is  chosen,  it  would  seem,  on  the  principles  set  forth 
in  this  book,  undesirable  that  the  public  should  pay  for  the  capi- 
talized value  of  the  land  rent  included  in  the  prospective  returns  of 
such  monopolies.  If  not  to  pay  for  such  capitalized  exploitation  in 
cases  where  the  public  chooses  to  take  over  the  ownership  of  any  in- 
dustries is  objectionable  as  discriminating  against  some  landowners 
while  allowing  others  to  continue  to  enjoy  site  rent,  then  the  taking 
over  of  these  industries  by  purchase  should  be  deferred  until  a  gen- 
eral policy  is  adopted  towards  all  site  rent.  Nor  should  govern- 
ment for  any  long  period  guarantee  interest  or  net  dividends  on  the 
bonds  or  stocks  of  companies  whose  property  it  undertakes  to  oper- 
ate.      For  suppose  that  during  the  period  of  such  a  guarantee,  one 


Taxation  of  Future  Increments  81 

be  stamped  out,  so  far  as  this  is  possible.  But  for  un- 
earned income  in  the  form  of  land  rent,  purely  as  such, 
the  tax  method  is  adequate  and  is  the  logical  method  of 
correction. 

Again,  even  if  there  are — as  there  may  be — other  in- 
crements than  situation  rent  which  are  equally  unearned, 
it  does  not  follow  that  the  heavier  taxation  of  land 
values  should  be  deferred  until  such  time  as  a  general 
agreement  is  reached  regarding  such  other  increments. 
It  may  suit  the  views  of  reactionaries  to  have  us  use  the 
claim  that  many  and  complicated  reforms  are  needed, 
as  a  reason  for  delaying  one  the  justice  and  desirability 
of  which  are  reasonably  evident,  but  that  kind  of  atti- 
tude should  scarcely  suit  anybody  else. 

§8 

The  Taxation  of  Future  Increments  of  Value 

Hesitating  to  accept  the  more  radical  proposal  of 
Henry  George  in  favor  of  sweeping  into  the  public  treas- 
uries situation  rent  both  new  and  old,  some  writers  have 

or  several  of  the  States,  or  the  Federal  government  itself,  should 
choose  to  adopt  a  new  tax  systenn,  e.  g-,  to  increase  very  greatly  the 
tax  on  site  values.  This  would  for  all  other  industries  than  the 
ones  in  question  diminish  the  land  rent  part  of  their  incomes,  though 
to  be  sure,  removal  of  other  taxes  might  increase  other  elements  in 
their  incomes.  But,  whatever  the  net  result  on  these  other  indus- 
tries, the  holders  of  the  securities  of  the  government-operated  indus- 
tries would  experience  no  effect  as  regards  their  annual  returns.  The 
better  way  would  be  to  guarantee  (if  there  is  to  be  a  guarantee  of 
past  earnings),  net  earnings  from  business  but  not  net  earnings  after 
the  subtraction  of  taxes. 


82  The;  Taxation  of  Unearned  Incomes 

contented  themselves  with  advocating  the  public  taxa- 
tion and  use  of  future  increases  in  the  rental  value  of 
land.^®  This  advocacy,  they  seem  to  have  felt,  frees  them 
from  the  necessity  of  urging  anything  that  looks  like 
confiscation.  But  there  are  reasons  for  thinking  that  if 
the  more  radical  proposal  involves  confiscation,  the  other 
does  also,  though  it  may  be  less  in  degree ;  and  it  is  doubt- 
ful if  the  more  moderate  plan  can  be  successfully  de- 
fended without  raising  a  presumption  that  the  more  far- 
reaching  scheme  has  also  something  in  its  favor. 

To  the  proposal  that  only  future  increases  in  rental 
value  be  taken  by  the  state,  it  has  been  answered  that  to 
take  future  increases  without  compensating  landowners 
in  the  case  of  future  decreases  in  the  value  of  their  land 
unfairly  deprives  them  of  the  chance  of  gain  while  still 
leaving  them  the  risk  of  loss.  In  the  words  of  F.  A. 
Walker,  "the  game  of  'heads  I  win,  tails  you  lose'  is  not 
one  in  which  the  state  can,  in  fairness  and  decency,  play 
a  part."^^  If  one  believes  that  the  present  rental  yield 
of  land,  as  well  as  future  increases  of  this  yield,  should 
not  go  to  the  private  owner,  this  contention  will  not  dis- 
turb him.     Otherwise  it  may  seem  to  be  convincing. 

There  still  remains  the  argument,  however,  that,  in  a 
growing  country,  increases  are  frequent  and  decreases 
rare  and  that,  therefore,  no  large  injustice  would  be  done 
by  the  scheme.  But  what  if  the  opposition  contends,  as 
it  plausibly  may,  that  the  present  owners  of  land  have,  in 

'^  See,  for  example,  Taussig,  Principles  of  Economics,  New  York 
(Macmillan),  1912,  Vol.  II,  p.  102.  This  scheme  was  suggested 
by  John  Stuart  Mill  in  the  middle  of  the  last  century. 

^^  Political  Economy,  Advanced  Course,  New  York  (Holt)  1887, 
pp.  416-17. 


Taxation  of  Future  Increments  83 

many  cases,  bought  it  at  prices  which  they  were  willing 
to  pay  only  because  of  the  prospect  of  future  increases? 
The  opposition  may  contend,  in  other  words,  that  ex- 
pected future  yields  have  been  discounted  into  the  pres- 
ent price  of  the  land,  and  that,  therefore,  to  tax  heav- 
ily these  future  yields  will  deprive  such  purchasers  of  an 
income  they  paid  to  receive,  and  will  depreciate  the  value 
of  their  land  below  the  price  at  which  they  bought  it. 
Some  increases,  to  be  sure,  may  come  as  unforeseen  luck, 
but  many  must  be,  at  least  in  part,  anticipated.  Is  a 
tax  on  such  increases  any  less  "confiscation,"  so  far  as 
the  capitalized  value  of  land  is  concerned,  than  would 
be  a  moderate  increase  in  tax  which  would  take  away  a 
part  of  the  constant  annual  rent  of  a  piece  of  land  bought 
with  no  expectation  of  a  rise,  but  bought  in  the  belief 
that  its  owner  would  be  left  undisturbed  in  the  enjoy- 
ment of  the  entire  rent? 

Without  now  pursuing  this  comparison  further,  we 
may  note  that  a  doctrine  according  to  which  the  public 
has  no  right  to  take  by  taxation  future  increases  in  land 
values,  increases  not  earned  by  any  service  rendered  by 
the  landowners,  must,  logically,  be  opposed  to  other  gov- 
ernmental policies  of  which  most  of  us  are  in  favor. 
Such  a  doctrine  would  mean,  for  instance,  that  the  pur- 
chaser of  stock  in  a  company  which  contemplated — or 
the  purchaser  of  whose  stock  foresaw  the  likelihood  of 
its  undertaking — selling  out  to,  or  becoming  part  of,  a 
monopoly  and  so  securing  monopoly  profits,  since  such 
purchaser  paid  more  for  his  stock  because  of  this  expec- 
tation, must  be  allowed  to  enjoy  these  monopoly  profits, 
or,  if  they  are  taken  away  from  him,  must  be  compen- 
sated. Has  the  purchaser  of  stock  under  circumstances 
of  this  kind  any  such  claim  even  if  the  policy  of  limiting 


84  The  Taxation  of  Unearned  Incomes 

monopoly  profits   is   one  which   was   not  previously   in 
force  but  was  adopted  after  he  purchased  the  stock? 

§  9 

Land-Value    Taxation    in    Relation    to    the    Theory    of 
Vested  Rights 

The  principal  objection  actually  felt,  if  not  the  one 
chiefly  emphasized  by  opponents  of  land-value  taxation, 
is  an  objection  based  upon  respect  for  v2sted  rights,  viz., 
that  such  a  scheme  of  taxation  would  take  away  from  the 
owners  of  land  a  large  part  of  the  capitalized  value  of 
their  property  by  making  it  impossible  for  them  to  enjoy 
from  it  the  expected  future  income.  If  a  piece  of  land 
yielding  $1,000  per  year  is  valued  on  a  5  per  cent,  basis, 
its  selling  price  would  be  $20,000.  To  take  $200  a  year 
would  mean,  since  a  tax  on  land  rent  cannot  be  shifted, 
that  the  selling  price  of  the  land  must  fall  to  $16,000. 
Hence,  it  is  said,  since  such  taxation  takes  from  the 
owner  a  fifth  of  the  value  of  his  property,  it  is  confiscation 
and  a  denial  of  vested  rights.  Of  course  what  we  defi- 
nitely take  is  a  fifth  of  the  yearly  income,  but  since  the 
value  is  dependent  upon  the  income  the  establishment 
of  such  a  tax  as  a  permanent  part  of  the  tax  system 
in  effect  takes  one-fifth  of  the  capital.  But  how  is  it  if 
through  indirect  taxation  we  take  $100  a  year  from  the 
family  of  a  workingman  whose  annual  income  is  $500 
If  the  man's  expectation  of  life  is  thirty  years,  would  not 
the  capitalized  value  of  his  income  be  well  in  the  thou- 
sands of  dollars,  supposing  it  to  be  salable?  And  would 
not  this  capitalized  value  be  reduced  one-fifth  by  a  tax 
of  $100  per  year  if  such  a  tax  were  adopted  as  a  perma- 
nent part  of  the  tax  system?    To  be  sure,  workmen  are 


The  Theory  op  Vested  Rights  85 

not  in  the  habit  of  thus  capitalizing  and  selHng  the  right 
to  their  future  incomes,  but  is  the  injury  to  them  from 
a  tax  any  the  less  for  that,  or  the  fundamental  nature  of 
the  problem  essentially  different?  If  a  need  of  increased 
revenues  were  thus  met,  there  might  be  sympathy  ex- 
pressed for  the  working  classes  and  objection  to  the  tax 
as  an  undue  hardship  upon  them,  but  the  word  "con- 
fiscation" or  the  expression  "vested  rights"  probably 
would  not  be  used.  No  complaint  would  be  made  that 
the  fundamental  rights  of  property  were  being  invaded 
or  that  society  had  violated  any  implied  pledge. 

It  seems  to  be  this  last  notion,  that  of  an  implied 
pledge  or  sanction  given  by  society,  which  makes  many 
thinkers  regard  so  askance  any  proposal  for  radical 
changes.  We  must  not  take  rent  in  taxation  because 
the  enjoyment  of  it  is  a  vested  right.  "Society"  has 
allowed  individuals  to  appropriate  nearly  all  of  rent  in 
the  past  and  various  persons  have  bought  land,  relying 
upon  the  continuance  of  the  system.  Hence  the  private 
enjoyment  of  land  rent  must  always  be  allowed  unless 
compensation  is  paid  by  the  dispossessed  to  the  posses- 
sors. 

If  we  are  perfectly  frank  in  our  adoption  of  this 
vested-rights  argument  as  a  reason  for  refusing  to  take 
from  those  enjoying  them  incomes  not  earned  by  service 
given  to  those  who  pay  them,  we  shall  have  to  admit  very 
frankly  that  several  types  of  incomes  ordinarily  objected 
to  by  economists  must  be  continued  indefinitely.  Thus, 
in  consistency,  we  must  protest  against  any  regulation  of 
monopoly  which  will  do  away  with  the  monopoly  prices 
on  which  any  monopolists  had  counted,  and  particularly 
so  if  the  monopolists  have  bought  stock  at  a  higher  price 
because  of  the  expectation  of  monopoly  profit.     "So- 


86  The:  Taxation  of  Unearned  Incomes 

ciety"  has  permitted  this  profit  in  the  past,  has  lent  its 
"sanction"  to  it,  has  allowed  people  to  buy  stock  in  the 
expectation  of  realizing  an  exceptional  profit.  May 
society,  therefore,  by  its  regulations  cut  down  this  profit? 
Must  it  not  pay  the  monopoly  prices  indefinitely  or  else 
compensate  the  monopolists  by  paying  them  in  advance 
the  capitalized  value  of  their  expected  future  monopoly 
profits  ? 

So,  again,  if  we  would  be  perfectly  consistent,  we  must 
not  remove  the  protective  tariff  on  goods  when  those  who 
have  invested  in  the  companies  producing  such  goods 
have  paid  more  for  their  stock  than  they  would  otherwise, 
in  the  expectation  of  deriving  protected  profits.  In  other 
words,  since,  largely  through  the  influence  of  those  en- 
gaged in  protected  industries,  the  policy  of  protection  has 
been  maintained  for  a  limited  number  of  years,  society  at 
large  owes  such  industries  a  continuance  of  favor.  In 
still  other  words — for  this  is  the  inescapable  implica- 
tion— those  who  wish  to  consume  the  protected  goods 
may  properly  be  required  to  pay  for  these  goods  an  ex- 
cess price,  a  price  above  the  real  value  of  the  service 
given.  In  this  view  of  the  case,  the  taxed  class,  being 
part  of  society,  has  some  sort  of  responsibility  for  what 
society  has  done,  even  for  what  the  class  that  profits  by 
protection  has  influenced  society  to  do,  and  has  no  right 
suddenly  to  refuse  longer  to  pay  tribute  to  the  protected 
class. 

The  foregoing  is  a  view  which  the  writer  cannot  bring 
himself  to  accept.  Society  is  under  no  obligation  nor  is 
any  class  in  society  under  an  obligation  to  pay  tribute 
to  any  person  or  group  of  persons  for  all  future  time. 
Still  less  is  a  class  which,  while  another  class  has  con- 
trolled government,  has  been  exploited,  under  obligation 


The;  Theory  of  Vested  Rights  87 

to  continue  to  let  itself  be  exploited  if  and  when  it  is  able 
to  get  into  the  saddle.  Society  as  such  has  given  no 
pledge,  and  is  not  in  a  position  to  give  a  pledge,  that 
its  policy  will  not  change.  Those  who  buy  stock  in  a 
monopoly  or  invest  their  money  in  a  protected  industry 
must  be  held  to  have  done  so,  not  under  any  guaranty  of 
permanence,  but  at  their  own  risk,  knowing  it  to  be  the 
right  of  the  rest  of  society  to  cease  paying  the  excess 
prices  and  adopt  a  new  policy  at  any  time. 

How  does  the  matter  stand  in  the  case  of  land  values? 
Must  not  purchasers  of  land  be  presumed  to  have  pur- 
chased in  the  knowledge  that  rates  of  taxation  might  be 
changed  and  that  government  might  discriminate,  for 
purposes  of  taxation,  among  different  kinds  of  property 
as  it  often  has  done  among  different  commodities?  Is 
it  correct  to  think  of  land-value  taxation  primarily  as  a 
system  of  taxation  that  infringes  on  vested  rights  by 
taking  something  away  from  landowners?  Is  it  not 
more  enlightening  to  call  to  mind  that,  indeed,  the  rest 
of  society  is  continually  (weekly,  monthly,  or  annually)-' 
paying  tribute  to  the  owners  of  land,  tribute  for  which 
neither  these  owners  nor  any  previous  owners  as  such 
have  ever  rendered  a  return  to  those  who  thus  pay  them  ? 
When  we  say  that  for  the  public  to  take  in  taxation  most 
of  the  rental  value  of  land  would  be  to  confiscate  the 
"property"  of  those  who  had  previously  enjoyed  this 
rent,  do  we  not  express  the  fact  the  wrong  way  about? 
Would  it  not  be  nearer  the  truth  to  say  that  the  rest  of 
society  simply  refuses  longer  to  have  its  earnings  con- 

20  Cf.  Henry  George,  Progress  and  Poverty,  Book  VII,  Chapter 
III,  particularly  pp.  362  and  363.  (Page  reference  is  to  edition  of 
1905,  Doubleday,  Page  &  Co.) 


88  The  Taxation  of  Unearned  Incomes 

fiscated  by  the  landowning  class?  Does  the  situation 
value  of  land,  the  value  apart  from  improvements,  repre- 
sent anything  else  but  the  estimate,  in  a  present  valuation, 
of  the  future  tribute,  the  future  payments  without  cor- 
responding services,  which  the  owners  are  in  a  position 
to  get  from  others?  Are  not  the  masses  paying  a  per- 
petual tax  to  the  owners  of  land  for  the  privilege  of  living 
upon,  and  making  use  of,  sites  which  were  neither  pro- 
duced nor  rendered  valuable  by  the  owners  ?  Suppose  the 
masses  who  are  thus  paying  tribute  without  receiving 
either  labor  services  or  more  capital  equipment  for  pro- 
duction than  would  otherwise  be  available,  or  indeed 
anything  else  worth  the  price,  simply  decide  to  stop 
paying  this  tribute !  Would  their  doing  this  be  confis- 
catory? And  must  they,  if  they  are  to  cease  paying,  com- 
pensate the  landow^ners  by  giving  to  the  latter  interest- 
bearing  bonds  worth  as  much  as  the  land,  and  payable 
finally,  as  to  interest  and  principal,  by  the  same  persons 
who  now  pay  rent?  Is  this  not  equivalent  to  saying, 
not  only  that  those  who  are  slaves  in  the  sense  that  they 
devote  much  of  their  labor  to  the  support  of  a  parasitic 
class  cannot  be  freed  without  provision  for  compensating 
the  parasitic  class,  but  also  that  the  compensation  must 
be  provided  by  the  slaves?  Could  we  reasonably  expect 
the  slaves,  once  they  were  in  the  saddle  politically  and 
thoroughly  understood  the  matter,  to  take  this  view  of 
it? 

As  an  analogy  to  the  payment  of  tribute  for  the  use 
of  land  to  persons  who  are  in  no  way  responsible  for  its 
existence,  let  us  suppose  that  an  ancient  king  or  a  small 
ruling  caste  has  somewhere  given  to  a  favorite  or  to 
someone  of  political  influence  the  negotiable  privilege 
of  collecting  each  year  a  certain  amount  of  the  taxes 


The  Theory  of  Vested  Rights  89 

and  turning  them  to  his  own  use.  The  favorite  later 
sells  his  "right"  to  another  for  a  large  sum  of  money 
which  that  other  had  honestly  earned  by  hard  and  faith- 
ful work  at  a  useful  task.  Some  time  after  this  second 
arrangement  is  made,  the  taxed  class  overthrows  the 
power  of  the  king  or  aristocracy  and  establishes  itself  in 
power.  Must  this  class  go  on  contributing  the  tax  be- 
cause the  would-be  recipient  paid  to  get  it,  notwithstand- 
ing he  paid  nothing  to  those  whom  he  now  expects  to 
pay  him?  And  if  they  refuse,  using  the  money  in  ques- 
tion instead  as  part  of  their  general  tax  fund  for  common 
purposes,  are  they  guilty  of  an  immoral  act  ?  Must  not  the 
would-be  collector  of  tax  money  be  assumed  to  have  made 
his  purchase  subject  to  the  condition  that  society  could  in 
its  own  good  time  make  such  changes  as  its  members 
might  see  fit?  And  if  the  remainder  of  society  came 
to  believe  that,  in  the  long  run,  the  greatest  good  to  the 
greatest  number  would  be  attained  by  establishing  a  sys- 
tem in  which,  in  general,  each  should  profit  according 
as  he  served,  and  in  which,  except  as  some  special  social 
reason  justified  the  apparent  exception,  no  one  might  re- 
ceive tribute  from  those  he  did  not  serve,  would  not 
society  have  a  moral  right  to  establish  such  a  system? 

The  truth  is  that  few  of  those  who  advocate  large 
taxation  of  land  values,  even  of  the  single-taxers,  urge 
any  but  a  gradual  change  in  the  rate  of  taxation  of  land. 
A  sudden  break  with  the  past  is  not  sought  for.  Nor,  if 
it  were,  would  there  be  any  serious  likelihood  of  its 
coming.  Though  we  may  work  for  the  change  with 
ardor,  it  will  probably  come  through  compromises  and 
little  by  little.  But  even  if  the  tax  change,  as  such,  were 
suddenly  made,  its  being  preceded  by  a  long  period  of 
agitation  and  of  growth  of  the  land  rent  taxation  senti- 


90  The  Taxation  of  Unearned  Incomes 

ment  would  forewarn  landowners  and  operate  to  ease 
the  transition  for  those  who  were  likely  to  lose  by  it. 
Indeed,  it  is  not  unlikely  that  by  the  time  such  a  change 
goes  into  effect — if  it  finally  does  go  into  effect — many 
landowners  will  have  come  into  possession  of  their  land 
more  or  less  expecting  the  change  and  will  have  allowed 
for  it  in  the  price  offered  for  the  land  they  have  pur- 
chased. 

Again,  even  if,  here  and  there,  a  town  or  city  in- 
creases rapidly  the  amount  of  tax  it  puts  upon  land, 
this  may  not,  while  the  new  system  is  not  general,  cause 
very  considerable  loss  to  landlords.  For  it  will  be  likely 
to  mean  that  in  those  cities  business  and  individuals 
are  relieved  of  other  taxation  which  elsewhere  they  have 
to  meet,  and  the  policy  will,  therefore,  probably  cause 
those  towns  to  be  more  rapidly  settled  (by  the  drawing 
of  population  away  from  other  towns)  and  land  rents 
in  them  to  go  up.^^  This  is  a  result  which  would  not  be 
brought  about  if  the  equally  rapid  increase  of  land- 
value  taxation  in  other  places  kept  the  balance. ^^ 

Furthermore,  even  if  the  tax  were  generally  applied,  no 
great  loss  would  fall  on  small  landowners  who  have  im- 
proved their  land  and  who  themselves  live  on  it,  persons 

21  Suggested  by  Professor  H.  J.  Davenport's  Exercises,  printed 
to  be  used  with  his  Economics  of  Enterprise.  Cf.  pp.  28  and  29 
of  Professor  Davenport's  article  in  the  American  Economic  Revieiv, 
March,  1917- 

22  Some  may  regard  it  as  an  objection  to  a  purely  local  applica- 
tion of  anything  approaching  the  single  tax  and  the  local  use  of  the 
funds  derived  from  it,  that  such  a  policy  gives  to  labor  in  the  town 
adopting  it  a  benefit  more  than  it  receives  elsewhere  and  therefore 
induces  labor  to  come  to  such  a  city  when  otherwise  it  would  stay 
away,  and,  by  inducing  surplus  labor  to  come,  brings  diminution  of 
the  product  of  this  particular  labor. 


The  Theory  oe  Vested  Rights  91 

who  own  their  own  homes  and  Httle  else,-^  and  many  such 
would  clearly  gain.  But  to  persons  owning  land  and 
buildings  which  are  used  by  others  or  for  the  production 
of  goods  to  be  sold  to  others,  a  tax  on  land  rent  might 
eventually  involve  a  considerably  heavier  burden,  since 
such  a  tax  clearly  cannot  be  shifted  (if  general),  while 
the  tax  on  buildings  very  possibly  can  be,  at  least  to 
some  extent.'* 

The  removal  of  taxation  from  all  capital  and  its  con- 
centration on  land  values  would  of  course  involve  an 
increased  burden  to  those  whose  property  was  chiefly  in 
land  values.  But  the  immediate  loss  to  the  person  who 
owned  both  land  and  capital  would  be  minimized  by  the 
fact  that  he  would  be  enjoying  relief  from  taxation  on 
his  capital  -^  (the  interest  from  which,  if  the  capital  was 
itself  earned  and  was  being  used  in  socially  advantageous 
ways,  would  be  earned),  at  the  same  time  that  he  was 
being  made  to  pay  heavier  taxes  on  his  land  (the  situa- 
tion rent  of  which  was  principally  unearned).  In  the 
end,  the  removal  of  taxation  on  capital  would  presumably 
reduce  interest  rates  if  the  leaving  of  larger  net  returns 
to  owners  of  capital  operated  to  encourage  capital  ac- 
cumulation.    But   for  some  time  the  average  property 

23  Cf.  Henry  George,  Progress  and  Poverty,  Book  IX,  Chapter  III. 

2*  Whether  a  tax  on  all  the  earnings  of  capital  regardless  of 
the  line  of  investment  could  be  shifted  and  to  what  extent,  would 
depend  on  whether  and  how  far  such  a  tax  diminished  saving.  See 
the  discussion  of  the  effect  of  interest  on  saving,  in  The  Theory  of 
Earned  and  Unearned  Incomes,  Chapter  III,  §  5  (last  three  para- 
graphs of  section) . 

25  If  the  shift  in  taxation  from  capital  to  land  were  great  and 
sudden,  therefore,  the  rate  of  interest  would  be  temporarily  higher 
and  whatever  was  left  to  landowners  of  site  rent  would  have  to  be 
capitalized,  for  a  while,  at  this  higher  rate. 


15 


92  The  Taxation  oif  Unearned  Incomes 


owner  would  probably  be  largely  compensated  in  his 
greater  net  interest  on  capital,  for  the  reduction  by  taxa- 
tion of  his  net  rent  on  land. 

In  truth,  when  all  is  said  regarding  confiscation,  we 
must  recall  that  government  cannot  possibly  raise  reve- 
nue without  taking  something  from  somebody.  And 
if  we  have  to  choose  between  taking  an  unearned  income 
already  being  collected  by  part  of  us  from  the  rest  of  us, 
or  allowing  part  of  us  to  enjoy  such  an  unearned  income 
and  taking  something  more,  in  taxes  for  common  pur- 
poses, from  the  rest  of  us,  the  choice  should  not  be 
difficult. 

To  be  relieved  of  the  burden  of  supporting  social 
parasites  by  rent  payments  while  at  the  same  time  sup- 
porting government  out  of  taxes,  and  instead  to  let 
the  rent  serve  also  as  the  taxes,  would  mean  a  clear  and 
large  net  gain  to  the  classes  previously  exploited.  Yet 
many  of  the  exploited,  understanding  little  what  is 
happening,  and  failing  to  distinguish  between  property 
incomes  based  on  service  and  property  incomes  purely 
exploitive,  prate  pseudo-learnedly  of  surplus  value,  the 
class  struggle,  and  the  prospective  evolution  from  cap- 
italism to  socialism.  Eternal  children  in  their  comprehen- 
sion of  the  working  of  economic  forces,  unwilling,  for 
the  most  part,  carefully  to  examine  any  other  economic 
philosophy  than  their  own,  the  majority  of  socialists  are 
ready  to  follow  the  Marxian  doctrines  wherever  they  may 
lead,  as  the  dancing  feet  of  the  care-free  children  of 
Hamelin  followed  into  the  dark  mountain-side  the  en- 
rapturing music  of  the  Pied  Piper.  The  socialistic  theory 
in  outline  is  simple.  To  the  mind  unused  to  analysis  it 
seems  to  be  both  a  comprehensive  and  a  conclusive  ac- 
count of  the  nature  of  exploitation.     But  its  doctrine  re- 


Ability  Theory  of  Taxation  93 

garding  the  nature  of  interest  on  capital  is  utterly  falla- 
cious -"  and  the  prospect  that  its  program  could  be  put  into 
effect  and  made  to  work  is  exceedingly  dubious. ^^  The 
classes  which  profit  by  privilege,  are,  in  their  understand- 
ing of  economic  and  social  phenomena,  but  little  superior 
to  the  exploited  masses.  Were  this  not  the  case,  and  were 
there  not  the  fear  of  Bolshevist  violence,  we  might  well 
expect  them  to  be  exultant  at  the  relative  strength  of  so- 
cialism among  reform  movements.  For  socialism  almost 
hopelessly  diverts  the  minds  of  those  who  might  be  the 
principal  protestants  against  the  receipt  of  unearned  in- 
comes into  an  indiscriminate  opposition  to  earned  and  un- 
earned incomes  alike.  And  it  therefore  serves  to  prevent 
recognition  of  facts  the  recognition  of  which  by  the 
masses  might  mean  to  those  who  hold  economic  power 
based  on  privilege  rather  than  service,  real  danger  of  its 
loss.  The  one  chief  virtue  which  socialism,  as  currently 
preached,  does  have,  is  its  insistence  that  evils  exist,  that 
present  conditions  are  far  from  ideal  and  that  the  doc- 
trines and  propaganda  of  the  privileged  classes  are  not 
to  be  accepted  as  final  truth. 

§  10 
The  Ability  Theory  of  Taxation 

Nor  should  we  be  turned  back  from  the  taxation  of 
land  rent  by  the  contention  that  the  proposal  so  to  raise 
much  or  most  of  the  public  revenues,  does  not  conform 
to  the  ability  theory  of  taxation.    It  has  never  been  finally 

28  See  The  Theory  of  Earned  and  Unearned  Incomes,  Ch.  Ill,  §  5 
and  Ch.  IV,  §   10. 

2^  See  the  preceding  essay  (I),  §  2. 


94  The  Taxation  oe  Unearned  Incomes 

established  that  taxation  ought  to  be  in  proportion  to 
abiHty.  Taxation  ought  to  be  arranged  with  a  view  to 
societal  welfare,  and  this  may  or  may  not  mean  that  it 
should  be  in  proportion  to  ability.  Societal  welfare  may 
be  better  furthered,  for  instance,  by  preventing  exploita- 
tion and  the  consequent  receipt  of  unearned  income, 
than  by  mathematical  precision  in  apportioning  taxes 
to  total  income  of  all  sorts.  The  ability  theory  of  taxa- 
tion rests  upon  much  the  same  ground  as  the  theory  of 
charitable  relief.  In  the  case  of  charitable  relief  it  is 
argued  that  the  sums  thus  expended  have  a  greater  (mar- 
ginal) utility  to  the  poor  and  helpless  who  receive  them 
than  to  the  relatively  prosperous  who  contribute  them 
(voluntarily  or  otherwise).  In  the  case  of  taxation  it 
is  argued  that  a  large  requisition  from  one  who  is  pros- 
perous may  involve  less  deprivation  and  sacrifice  than  a 
small  requisition  from  one  who  is  comparatively  poor,  or, 
otherwise  expressing  the  same  idea,  that  to  take  money 
from  the  well-to-do,  even  though  they  have  fairly  earned 
it  by  giving  equivalent  service,  and  to  expend  it  for  pub- 
lic purposes  so  that  a  large  part  of  the  benefits  from  its 
expenditure  is  received  by  the  relatively  poor,  will  in- 
crease utility  and  will  increase  the  sum  total  of  happiness. 
Assuming  wants  to  be  equal,  one  might  with  some  plausi- 
bility argue  that  the  maximum  of  aggregate  human  hap- 
piness could  only  be  attained  by  carrying  this  principle 
to  the  point  of  equalization  of  incomes.  But  long  before 
incomes  had  been  equalized  the  effects  on  efficiency  of 
labor,  perhaps,  also,  on  the  rate  of  accumulation,  and, 
possibly,  on  biological  selection,  resulting  from  neglect 
of  the  principle  of  making  incomes  received  depend  on 
services  rendered,  would  become  serious.  The  greatest 
welfare  would  not  be  thus  secured,  m  the  long  run.  If, 


Ability  Theory  of  Taxation  95 

therefore,  we  venture  to  make  some  partial  application, 
in  our  tax  system,  of  the  principle  of  equalizing  incomes, 
we  must  sharply  limit  our  application  of  this  principle 
in  the  taxation  of  earned  incomes  lest  we  depart  too  far 
from  the  principle  of  proportioning  incomes  received  to 
services  rendered.  But  whether  or  not  there  are  classes 
which,  because  of  their  poverty,  ought  to  receive  from  the 
community  in  personal  incomes  and  in  services  from  gov- 
ernment, more  than  they  contribute,  in  taxes  and  other- 
wise, to  the  community,  it  seems  quite  certain  that  the 
recipients  of  situation  rent,  as  a  whole,  do  not  constitute 
such  a  class.  And  whatever  justification  there  may  be, 
from  the  point  of  view  of  maximizing  utility,  in  pro- 
viding that  the  poor  should  exploit  the  rich,  it  is  doubt- 
ful whether  there  is  any  equally  plausible  justification 
for  provisions  which  enable  the  rich  to  exploit  the  poor.^^ 
This,  it  is  believed,  is  mainly  the  direction  which  is  taken 
by  the  exploitation  growing  out  of  our  present  land  sys- 
tem. If,  then,  among  the  owners  of  land  who  profit  by 
the  exploitation  which  is  inextricably  bound  up  with  the 
present  system,  are  to  be  found  the  ubiquitous  "widows 
and  orphans"  whose  anticipated  distressful  state  has  been 
made  the  basis  of  opposition  to  many  other  necessary  re- 
forms, it  is  better  that  society  should  make  special  pro- 
vision for  them  in  those  exceptional  cases  (assuming 
that  there  are  any  such)  where  the  shifting  of  the  tax 
burden  from  other  values  to  site  values  threatens  them 
with  poverty,  than  that  it  should  forever  maintain  a  bad 

28  The  writer  is  not  unaware  that  such  exploitation  has  been 
suggested  as  a  means  by  which  savings  may  be  made  which  the 
poor,  having  many  unsatisfied  needs,  would  not  make.  See  an  arti- 
cle by  Alvin  S.  Johnson,  in  the  Political  Science  Quarterly,  XXIII, 
pp.  221-241  on  "Protection  and  the  Formation  of  Capital." 


96  The  Taxation  of  Unearned  Incomes 

system.  Indeed  there  must  be  many  widows  and  orphans 
who  are  victims  of  this  system,  of  which  some  of  their 
class  may  be  beneficiaries.' 

§  11 

The  Taxation  of  "Excess  Profits"  versus  The  Taxation 
of  Land  Rent 

In  view  of  the  contemporary  popularity  of  taxes  on 
so-called  excess  profits,  the  question  ought  to  be  raised 
whether  such  profits  can  advantageously  be  taxed,  year 
in  and  year  out,  on  the  same  basis  as  site  rent.  These 
excess  profits,  when  they  are  not  the  fair  earnings  of 
superior  efficiency  in  serving  the  public,  must  be  either 
the  returns  of  monopoly  or  the  gifts  of  chance.  If  they 
are  the  returns  of  monopoly  it  is,  indeed,  better  to  tax 
them  than  to  allow  them  to  be  privately  enjoyed,  but 
it  is  better  still  to  protect  the  consumers  of  the  monop- 
olized goods  against  extortion.  If  the  excess  profits  are 
the  gifts  of  chance  they  must  be  considered  along  with 
chance  losses,  and  when  so  considered  will  be  seen  not 
to  be  analogous  to  land  rent.  For,  as  was  stated  in  a 
previous  section,"^  it  is  incorrect  to  equate  continuous 
exploitation  varying  only'  in  degree  (rent  of  land)  with 
occasional  in-excess-of-average  pay  for  services  which, 
on  other  occasions,  may  receive  less  than  average  re- 
muneration. 

But  there  is  another  important  reason  for  discriminat- 
ing between  excess  profits,  so-called,  and  land  rent.  Large 
returns  in  any  line  of  business  which  is  relatively  unable 
to  meet  the  demands  upon  it  for  goods  or  services  are 

29§    7. 


Excess  Profits  Taxes  97 

the  means  by  which,  in  the  competitive  system,  men  and 
capital  are  induced  to  go  into  such  a  business.  The  goods 
and  services  produced  by  the  business  are  temporarily 
worth  more  than  ordinarily  to  the  community  because 
they  are  relatively  scarce.  But  the  larger  returns  there- 
fore received  by  those  in  the  business  in  question  bring 
their  own  correction  just  because  they  operate  to  draw 
men  and  capital  into  the  desired  line  of  production  and 
so  increase  competition.^"  Not  only  is  it  true,  then,  that 
the  excess  returns  tend  to  be  only  temporary,  but  it  is 
also  true  that  to  tax  them  largely  out  of  existence  might 
operate  to  retard  the  very  readjustment  of  occupations 
and  investments  which  is  needed.  No  such  objection  can 
be  raised  to  the  high  taxation  of  land  rent,  since  such 
taxation  is  specifically  intended  to  be  independent  of 
the  use  which  any  individual  chooses  to  make  of  his  land. 
But  in  spite  of  the  differences  which  analysis  makes  it 
possible  to  point  out  between  land  rent  and  other  kinds 
of  incomes,  economists  of  the  conservative  school  will 
doubtless  continue  to  refuse  to  see  any  differences  which 
tend  to  support  special  taxation  of  land  rent  as  against 
such  other  incomes.  And  when  asked  to  suggest,  from 
time  to  time,  how  larger  revenues  may  be  secured  for 
important  governmental  services,  they  will  probably  con- 
tinue to  look  towards  almost  any  other  conceivable  source 
rather  than  to  advise  increased  taxation  of  rent. 

30  Such  evils  as  result  from  changes  in  the  general  level  of  prices 
should  be  corrected,  so  far  as  possible,  by  stabilizing  banking  con- 
ditions and  the  value  of  the  monetary  standard. 


98  The  Taxation  of  Unearned  Incomes 

§  12 

The  Taxation  of  Inheritances 

Let  no  one  conclude  that  our  argument  tells  equally 
against  all  inheritance  on  the  ground  that  those  who  pay 
interest  for  the  use  of  capital  accumulated  by  previous 
generations  are  paying  for  a  service  to  persons  who  did 
not  contribute  that  service.  For  it  well  may  be,  in  the 
case  of  inheritance  of  capital  produced  by  human  labor, 
that  the  prospect  of  descendants'  reaping  return  from 
it  is  a  condition  without  which,  in  great  part,  it  would 
not  be  saved.  If  so,  the  interest  is  paid  for  a  service 
which,  except  for  the  prospect  of  interest  payment  to 
descendants,  might  never  have  been  rendered ;  it  is  paid 
for  the  use  of  capital  which,  except  for  expectation  of 
reward  to  descendants,  might  never  have  been  added  to 
society's  equipment.  As  long  as  the  family  affections 
endure  in  their  present  strength  much  of  the  happiness 
of  parents  will  be  realized  only  as  they  are  permitted 
to  work  for  the  future  prosperity  of  their  children.  Gen- 
eral welfare  and  happiness  would  probably  not  be  fur- 
thered by  a  policy  which  should  entirely  deprive  parents 
of  the  privilege  of  bequest.  Nor  would  the  community 
probably  get,  in  the  long  run,  the  use  of  so  much  capital, 
for  less  would  probably  be  accumulated.  A  parent  will 
be  less  likely  to  save  and  to  invest  his  earnings  in  the 
education  of  his  children  if  he  believes  society  will  ap- 
propriate all  the  gain  and  will  not  allow  his  children  to 
.reap  a  larger  income  for  the  larger  service  which  such 
education  enables  them  to  render.  And  in  like  manner, 
a  parent  will  be  less  inclined  to  save  and  invest  in  capital 
construction  if  he  believes  that  society  will  allow  his 


Inheritance;  Taxation  99 

children  to  reap  no  advantage  in  return  for  the  service 
from  such  capital. 

It  is,  clearly,  illogical,  then,  to  abolish  the  inheritance 
of  wealth  without  abolishing  at  the  same  time  all  the  ad- 
vantages of  nurture  and  education  that  the  children  of 
thoughtful,  thrifty  and  affectionate  parents  have  over 
the  children  of  other  parents.  It  is,  in  short,  illogical 
to  abolish  the  inheritance  of  wealth  unless  we  also  abol- 
ish the  family  and  make  all  children  wards  of  the  state. 

There  is  no  intention  to  suggest,  however,  that  inherit- 
ances should  never  be  taxed  or  that  the  law  of  inheritance 
is  not  in  need  of  modification.  When,  as  at  present,  the 
state  provides  for  inheritance  of  the  property  of  intes- 
tate decedents  by  remote  collaterals  who  have  often  been 
unacquainted  with  their  unconscious  benefactors,  it  can 
hardly  be  said  that  the  policy  adopted  has  been  dictated 
by  the  necessity  of  encouraging  accumulation  or  by  the 
desirability  of  giving  men  and  women  the  happiness  of 
safe-guarding  the  future  welfare  of  those  for  whom 
their  affections  are  strongest.  Also,  so  far  as  the  ex- 
istence of  large  estates  is  the  outgrowth  of  a  past 
when  individuals  have  been  allowed  to  receive  large 
incomes  which  they  have  not  earned,  or  so  far 
as  such  estates  may .  result  from  our  inability  ever 
completely  to  prevent  the  securing  of  ill-gotten  gains,  the 
regulation  of  the  transmission  of  great  estates  or  their 
high  taxation  may  be  the  only  means  of  avoiding  the  per- 
petuation of  a  most  undesirable  inequality.  Even  the 
transmission  of  estates  honestly  earned  may  properly  be 
limited  or  regulated  or  the  estates  heavily  taxed  if  the 
inequality  resulting  from  their  undivided  bequeathal  is 
likely  to  prove  a  danger  to  democracy. 


100        The  Taxation  of  Unearned  Incomes 

But  whatever  may  be  the  advantages  to  the  general 
welfare  of  maintaining  in  considerable  degree  the  right 
of  inheritance  and  bequest,  there  appears  to  be  no  reason 
to  believe  that  to  keep  the  major  part  of  ground  rent 
from  going  into  the  pockets  of  individuals  would  de- 
crease the  amount  of  land  or  the  amount  of  any  other 
capital. 

§  13 

Some  Probable  Effects  of  Making  Land  Rent  the  Chief 
Source  of  Public  Revenues 

If  taxes  were  removed,  for  the  most  part,  from  other 
capital  and  were  concentrated  on  land,  several  conse- 
quences would  follow.  The  net  returns  to  owners  of 
capital  would  be  greater,  because  less  taxed,  and  this 
would  mean  a  higher  rate  of  interest  to  them  on  the 
value  of  their  capital.  If  this  higher  rate  of  interest  re- 
sulted in  increasing  accumulation,  the  rate  might  even- 
tually somewhat  decline.  So  long,  however,  as  the  net 
rate  of  interest  remained  higher  than  before,  there 
would  be  two  reasons  for  a  decline  in  the  selling  value 
of  land.  Land  would  decline  in  value  because  the  net 
rent  to  its  owners  would  be  reduced  by  the  tax.  And  it 
would  decline  also  because  its  future  rent  would  be  cap- 
italized, for  a  time  at  least,  at  a  higher  interest  rate.  For 
the  value  of  land,  unlike  the  value  of  capital,  has  no  re- 
lation to  its  cost  of  production.  Land,  as  we  have  here 
defined  it,  has  no  cost  of  production.  Its  value  can  be 
arrived  at  only  by  knowing  or  estimating  its  future  rent 
(or  surplus  yield  over  interest  and  wages)  and  capital- 
izing this  future  rent  at  the  market  rate  of  interest. 


Efi'Ects  of  Land  Rent  Taxation  101 

If,  then,  a  piece  of  land  is  expected  to  yield  $100  a 
year  for  an  indefinite  future,  in  excess  of  the  wages  and 
interest  expended  in  making  use  of  it,  and  if  the  market 
rate  of  interest  is  5  per  cent.,  the  land  will  be  valued  at 
$2,000.  A  tax  which  should  take  each  year  $75  from 
the  $100  previously  left  to  the  owner,  leaving  him  a  net 
rent  of  only  $25,  would  reduce  the  value  of  the  land  in 
as  great  a  proportion,  i.e.  to  $500.  The  annual  yield  to 
the  owner,  after  the  tax,  would  be  as  large  a  percent- 
age as  before  of  the  price  at  which  his  land  could  be  sold. 
Hence  he  would  have  no  more  motive  to  sell  the  land 
than  he  had  before  and  he  would  continue  to  do  with  the 
land  exactly  what  he  would  do  with  it  if  there  were  no 
tax.  The  speculative  holder  of  land,  however,  would 
find  the  tax  a  reason  for  not  holding  his  land  idle  and, 
if  he  could  not  use  it,  would  have  to  let  it  go  to  those 
who  could. 

But  if  the  removal  of  taxation  from  capital  means 
that  the  owner  of  capital  enjoys  even  tempor?.rily  a 
higher  net  interest  than  before,  because  an  untaxed  in- 
terest, the  fall  in  the  selling  value  of  land  will  be  more 
pronounced.  For  the  prospective  $25  a  year  of  rent  left 
to  the  owner  if  the  land  is  taxed,  which,  if  net  interest 
is  5  per  cent.,  makes  the  land  worth  $500,  will,  if  net 
interest  is  (say)  6  2-3  per  cent.,  make  the  land  worth 
only  $375. 

Let  us  consider,  now,  the  efifects  likely  to  be  produced 
upon  different  classes  by  a  change  in  the  tax  system 
which  should  remove  the  burden  of  taxation,  in  large 
part,  from  capital  and  commodities  and  concentrate  it 
on  land.  The  belief  has  been  long  held  by  many  per- 
sons that  farmers  would  regard  such  a  system  of  taxation 
as  bearing  more  heavily  upon  them  as  a  class  than  upon 


102        Thk  Taxation  01"  Unearned  Incomes 

city  dwellers.  What  evidence  is  available,  however,  seems 
to  show  that  land  values,  at  least  in  some  of  our  states, 
are  much  larger  in  proportion  to  improvement  and  build- 
ing values  in  the  cities  than  in  the  country.^^  Further- 
more, many  farmers  are  coming  to  resent  being  taxed  on 
their  improvements  which  constitute  so  large  a  propor- 
tion of  their  total  possessions,  while  they  see  speculative 
holders  of  unimproved  agricultural  land,  who  are  render- 
ing to  the  public  no  service,  paying  taxes  much  lower 
and  often  insignificant. 

The  typical  small  farmer  would  very  likely  have  con- 
siderable to  gain  from  a  system  of  securing  public  rev- 
enues which  avoided  taxing  him  on  his  buildings,  ma- 
chinery, stock,  orchards  (except  the  bare  land),  fences, 
drainage  improvements  and  the  fertility  put  into  the  soil 
by  his  own  efforts,^"  which  avoided,  also,  taxing  com- 

31  See  Fillebrown,  T/ie  A.  B.  C.  of  Taxation,  New  York  (Double- 
day-Page  &  Co.),  1909,  Chapter  IX. 

"2  For  the  purposes  of  taxation,  it  is  not  to  be  assumed,  however, 
that  the  rental  value  of  agricultural  land,  as  distinguished  from  the 
interest  on  capital,  necessarily  includes  only  the  rental  value  which 
the  land  might  have  if  the  exhaustible  fertility  elements  of  the  soil 
were  entirely  withdrawn.  In  most  cases  the  land  would  become 
unusable  without  some  restoration  of  fertility  elements,  before  this 
point  had  been  reached.  Land  which  has  been  so  far  exhausted 
that  it  will  not  yield  to  labor  and  to  the  capital  invested  in  build- 
ings, machinery,  etc.,  the  ordinary  wages  and  interest,  unless  its  fer- 
tility is  iv/iolly  or  in  part  restored,  and  which  would  therefore  be 
abandoned  if  restoration  were  not  feasible,  might  not  be  altogether 
without  fertility  elements  capable  of  further  exhaustion.  But  no 
one  could  afford  to  live  on  the  produce  of  his  labor  on  this  land, 
while  thus  carr3'ing  the  exhaustion  further.  The  minimum  of  prac- 
tically exhaustible  fertility  has  been  reached.  If,  now,  a  piece  of 
agricultural  land  exhausted  to  this  degree  is  so  well  situated  that  a 
would-be  tenant  could  afford  to  pay  rent  for  it,  provided  he  were 


Effects  of  Land  Rext  Taxation  103 

modities  of  which  he  was  a  purchaser,  and  which  taxed 
only  the  value  of  the  unimproved  land.     His  net  annual 

assured  either  a  perpetual  lease  or,  on  termination  of  the  contract, 
the  full  cost  value  of  his  refertilization,  this  rent  would  measure 
the  rental  value  of  the  land  as  distinguished  from  interest  on  capital. 
That  land  which  is  so  far  exhausted  as  not  to  be  practically  usable 
without  some  degree  of  restoration,  may  nevertheless  be  so  well  sit- 
uated as  to  yield,  if  restored,  something  in  excess  of  the  wages  of 
labor  and  the  interest  of  capital  employed  upon  it,  including  in  "capi- 
tal" the  restored  fertility  of  the  land,  will  be  readily  admitted.  Such 
a  yield  is  clearly  rent. 

Gas  and  oil  wells  and  mines,  like  farms,  are  exhaustible.  But 
they  differ  from  farms  in  that  exhaustion  is  necessarily  permanent. 
The  owner  never  replaces  what  he  takes  from  them-  There  is, 
consequently,  no  problem  of  distinguishing  between  the  rental  value 
given  by  nature  and  anj-  interest  return  on  elements  replaced  by 
the  owner.  The  rental  value  of  the  ore  of  a  mine  as  distinguished 
from  the  interest  on  machinery,  shafts,  corridors,  etc.,  is  all,  clearly, 
unearned  (except  so  much  as  may  fairly  be  conceded  as  reward 
to  the  discoverer  of  the  mine  for  making  it  available  somewhat 
sooner  than  it  might  otherwise  be  found — cf.  §  5  of  this  chapter), 
and  may  be  taxed  with  justice  at  a  very  heavy  rate,  perhaps  up 
to  loo  per  cent  a  year.  This  conclusion  need  not  interfere  with  a 
governmental  policy  designed  to  conserve  mineral  wealth  for  fu- 
ture generations.  Either  inducements  could  be  made  to  owners 
to  conserve,  by  a  policy  of  remission  or  partial  remission  of  taxes 
on  unused  mines  (which  policy  might,  however,  offer  temptations 
to  speculative  holding  of  some  mines  so  inducing  all  the  greater 
use  of  others,  or  to  monopolistic  restriction  of  output),  or  the  gov- 
ernment could  buy  mines  outright  for  the  purpose  of  conservation, 
being  able  to  buy  them  more  cheaply  because  of  this  policy  of  taxa- 
tion than  if  private  individuals  were  permitted  to  appropriate  all 
the  income  from  natural  mineral  resources.  This  will  be  an  un- 
welcome conclusion  to  the  owners  of  our  mines  of  gold,  silver,  cop- 
per, lead,  zinc,  iron,  coal,  etc.,  but  from  the  point  of  view  of  the 
masses  it  is  a  just  conclusion  nevertheless.  For  that  a  few  men 
should  be  permitted  to  derive  tribute  from  the  remainder  as  a  con- 


104        Thi3  Taxation  of  Unearned  Incomes 

returns  would  frequently  be  larger,  although  the  selling 
value  of  his  property  would  be  smaller.  Considered  as 
a  potential  land  speculator  he  would  be  worse  off.  But 
considered  as  a  farmer  who  intended  to  remain  such  and 
to  pass  the  farm  on  to  his  children,  he  and  they  would 
be  better  off.  Such  a  farmer,  if  he  owned  his  farm  free 
of  debt  could  accumulate  wealth  the  more  rapidly  be- 
cause of  the  assumed  change.  And  if,  previous  to  the 
tax  change,  the  farm  had  borne  a  mortgage,  the  new 
system  would  enable  the  farmer  more  easily  to  get  out 
of  debt.  Indeed,  there  seem  to  be  a  very  large  percent- 
age of  farmers  who,  with  good  management  and  indus- 
try, can  hardly  get  incomes  which  amount  to  fair  wages 
for  their  labor  and  interest  on  the  cost  value  of  their 
improvements.  Such  farmers  get  no  land  rent  at  all,  or 
an  insignificant  rent,  and,  therefore,  zvould  pay  no  tax  at 
all  if  no  property  but  land  zvere  taxed  or  would  pay 
a  merely  nominal  tax  of  a  fczv  cents  an  acre.  Those 
economists  who  favor  confining  increase  of  taxation  of 
the  rental  value  of  land,  to  cities,  for  local  purposes, 
might  well  be  objects  of  suspicion  to  such  farmers.  For 
it  appears  often  to  be  in  the  cities  that  the  receipt  of  large 
incomes  from  the  rental  values  of  land  is  most  important ; 

dition  precedent  to  the  enjoyment  by  the  latter  of  nature's  subter- 
ranean gifts,  tends  neither  toward  equality  of  opportunity  nor  to- 
ward general  wellbeing. 

In  passing,  attention  may  be  called  to  the  fact  that  there  is  noth- 
ing in  the  scheme  to  tax  land  rent  which  need  at  all  militate  against 
the  forestation  of  land.  Under  this  scheme  idle  lands  can  be  the 
more  cheaplj'  secured  by  government  for  forestation  purposes.  Under 
it,  the  additional  value  due  to  an  individual's  forestation  goes  un- 
taxed. And  under  it,  as  now,  special  exemptions  from  taxation  can 
be  given,  if  it  is  believed  that  private  forestation  is  of  general 
benefit,  to  encourage  such  forestation. 


EFFECTS  OF  Land  Rent  Taxation  105 

and  it  is  very  clear  that  the  high  values  of  the  city  lots 
from  which  these  incomes  are  drawn  are  sometimes  due  in 
great  degree  to  the  growth  of  environing  farm  commun- 
ities. At  all  events,  it  may  properly  be  asked  why 
the  large  rental  incomes  from  city  lands  may  not  be 
taxed  to  meet  the  cost  of  state  functions  in  the  benefits 
of  which  farmers  share,  as  well  as  for  purely  local  ex- 
penses. 

But  let  us  consider  the  case  of  the  prospective  farmer, 
or  of  the  tenant  farmer  who  desires  to  become  a  farm 
owner.  To  him  there  is  a  still  greater  benefit  as  to 
which  there  can  be  absolutely  no  question.  For  a  tax 
on  land  or  land  rent  causes  land  to  be  obtainable  more 
cheaply  than  before.  A  farm  the  net  rental  value  of 
which  is  $100  a  year  is  worth,  capitalized  on  a  5  per 
cent,  basis,  $2,000.  But,  as  we  have  seen,  a  tax  upon  it 
of  $75  per  year,  leaving  the  owner  $25  while  raising 
the  rate  of  interest  (unless  and  until  the  stimulus  to 
greater  saving  again  lowered  the  rate)  to  6  2-3  per  cent., 
would  reduce  the  selling  value  of  the  land  to  $375.  The 
purchasing  farmer  would,  to  be  sure,  have  to  pay  each 
year  thereafter  the  $75  in  taxes,  but  this  he  could  pay 
and  more  than  pay  out  of  the  interest  on  his  saving  of 
$1,625  in  the  purchase  price,  even  if  this  interest  re- 
mained only  5  per  cent.  For  5  per  cent,  on  a  saving  of 
$1625  would  be  $81^.  And  besides  this,  it  is  to  be  noted 
that  the  farmer  would  now  get  not  5  per  cent,  but,  for 
a  while  at  least,  a  net  return  of  6  2-3  per  cent,  on  his 
investment  in  capital.  Let  it  be  noted  that  just  as  the 
acquisition  of  farms  would  be  facilitated  in  the  country 
so  would  be  facilitated  the  acquisition  of  homes  in  the 


106        The  Taxation  oi^  Une;arned  Incomes 

cities. ^^  But  half  measures  will  not  suffice.  To  tax 
only  future  increases  of  land  values  is  not  very  appre- 
ciably to  cheapen  land  and  so  make  the  acquisition  of 

33  There  is  no  intention  to  argue  that  all  land  ought  to  be  used 
when  it  is  not  all  needed.  Neither  is  it  intended  to  deny  that  the 
holding  of  well-situated  land  out  of  use  for  a  few  years  may  some- 
times render  easier  the  possibility  of  a  better  use  (See  Fisher,  The 
Nature  of  Capital  and  Income,  New  York,  Macmillan,  1906,  pp. 
253-4),  that  speculation  in  city  lots  may  yield  a  service  by  preventing 
land  from  being  built  on  too  soon  and  so  saving  it  for  prospective  high 
buildings  without  necessitating  the  tearing  down  of  old  and  lower 
ones.  But  if  any  economic  waste  is  ever  so  avoided  it  is  probably 
more  than  equalled  by  the  waste  involved  in  constructing  longer 
streets,  in  walking  and  riding  longer  distances  past  vacant  land  by 
thousands  of  city  dwellers  and  in  transporting  goods  farther  from 
store  to  store  and  from  stores  to  homes  than  would  otherwise  be  nec- 
essary. Individual  estimates  of  gains  and  losses  do  not  tend  to  result 
in  the  most  economical  arrangements  when  the  gains  and  losses  do  not 
accrue  to  the  same  person.  Furthermore,  in  practice,  the  notion 
that  money  can  be  made  by  speculation  in  real  estate,  probably  op- 
erates as  would  a  partial  combination  among  holders  of  vacant 
land,  thus  forcing  up  rents  and  the  price  of  land.  Also,  such  unused 
land  is  raised  in  value  not  only  by  road  and  street  construction  but 
also  by  other  improvements  and  services  paid  for  from  community 
funds.  Hence  to  tell  the  owners  of  land  that  the  improvements 
will  be  paid  for  chiefly  by  those  owners  who  build  upon  and  use 
their  land,  is  not  merely  to  avoid  discouraging  the  speculative 
holding  of  land.  It  is  to  offer  a  distinct  encouragement  to  such 
holding.  As  to  those  economists  who  argue  that  the  free  play  of 
individual  speculation  in  land  will  usually  keep  land  from  present 
use  only  if  there  are  probabilities  of  a  better  future  use  (which  the 
poorer  present  use  is  assumed  to  negative),  would  any  of  them 
deny  that  when  owners  who  build  on  and  use  their  land  are  there- 
fore forced  to  pay  higher  taxes  which  in  part  are  so  spent  as  to  in- 
crease the  value  of  idle  land,  the  tendency  will  be  for  land  to  be 
uneconomically  and  wastefully  held  out  of  present  use? 


Effects  of  Land  Rent  Taxation  107 

farms  and  homes  more  easy.  It  is  simply  to  prevent  such 
acquisition  from  becoming  more  difficult.  If  such  a 
tax  is  moderate  it  may  not,  in  the  long  run,  accomplish 
even  this.  In  connection  with  this  problem,  attention  may 
be  called  to  a  serious  objection  to  the  extensive  use  of  the 
now  very  popular  income  tax.  In  so  far  as  the  income  tax 
is  largely  relied  upon  as  a  source  of  revenue,  land  values 
tend  to  be  relieved  of  taxation.  As  a  result,  the  salable 
value  of  land  is  high ;  ownership  of  farms  and  homes 
becomes  difficult  except  for  the  well-to-do ;  and  tenancy 
is  unnecessarily  accentuated.  Thus,  indirectly,  may  the 
income  tax,  zvhich  many  have  hopefully  advocated  as  an 
aid  to  the  attainment  of  economic  democracy,  prove  to  be 
an  obstacle. 

To  sum  up,  the  change  here  discussed  would  remove 
heavy  tax  burdens  some  of  which  rest  in  large  degree 
on  wages ;  it  would  add  to  the  net  returns  on  capital ;  it 
would  discourage  speculative  holding  of  land;  it  would 
make  more  easy  the  acquiring  of  land  for  production  or 
for  homes  and  so  would  facilitate  the  change  from  ten- 
ancy to  ownership.  Those  who  were  ambitious  to  get 
farms  and  homes  for  themselves  would  have  larger  (be- 
cause untaxed  or  less  taxed)  earned  incomes  to  buy 
with,  and  they  would  not  have  to  pay  in  advance,  in  a  high 
price  of  land,  the  capitalized  value  of  exploitation,  al- 
though only  in  case  all  rent  were  taken  in  taxation  would 
even  unimproved  land  be  obtainable  for  nothing.  It  may 
be  added  that  a  population  of  home  owners  would  be  a 
substantial  bulwark  against  such  irrational  revolutionary 
economic  changes  as  are  advocated  by  many  radical  so- 
cialists. On  the  other  hand,  in  a  country  where  the  few 
own  nearly  all  the  wealth  and  the  many  are  but  ten- 
ants or  laborers  possessing  nothing  except  their  labor, 


108        The:  Taxation  of  Unearned  Incomes 

a  parasitic  class  can  maintain  the  status  quo  under  the 
forms  of  democracy  only  by  corrupting  the  voters  or 
their  elected  servants  or  by  controlling  the  avenues  of 
information. 

There  is  no  intention  to  argue  that  every  farmer  would 
find  his  tax  burden  lightened  if  land  rent  were  made  the 
principal  or  the  exclusive  source  of  public  revenue.  Some 
farmers  there  doubtless  are  whose  incomes  are  in  con- 
siderable degree  made  up  of  rent.  But  these  are  farm- 
ers who  realize  a  good  surplus  above  fair  returns  for 
their  work  and  their  investment  in  capital.  These  are 
farmers  who  can,  as  a  rule,  easily  bear  a  heavier  tax 
burden.  Under  our  present  system  of  taxation  we  tax 
the  earned  incomes — interest  and  wages — of  farmers  and 
of  all  other  persons.  We  diminish  the  profitableness  of 
making  improvements  in  soil  and  drainage,  of  erecting 
buildings,  of  planting  orchards,  of  accumulating  machin- 
ery and  stock.  But  we  tax  land  rents  so  lightly  as  to 
leave  land  values,  i.  e.,  capitalized  prospective  rents,  high, 
and  so  make  it  seem  easy  and  relatively  worth  while  for 
discouraged  users  of  land  whose  labor  and  interest  in- 
comes are  highly  taxed,  to  sell  their  land  and  live  out 
their  money.  In  brief,  our  policy  of  taxation  gives  al- 
most the  maximum  encouragement  to  speculation  in  land, 
keeps  the  price  of  land  high  and  so  makes  it  hard  to  ac- 
quire except  by  the  wealthy  few,  keeps  earned  incomes 
derived  from  the  use  of  land  relatively  low  and  tempts 
users  of  land  to  sell.  We  pretend  to  desire  widespread 
ownership.  We  repeat  unctiously  the  dictum  of  Arthur 
Young  that  "the  magic  of  property  turns  sand  into 
gold."  But  we  adopt  a  policy  which  works  in  the  direc- 
tion of  tenancy. 


Effects  of  Land  Rent  Taxation  109 

Even  those  property  owners  whose  personal  pecuniary 
interests  cause  them  to  object  to  putting  taxes  chiefly 
upon  land  rent  might  well,  perhaps,  give  thought  for  a  lit- 
tle while,  to  the  interests  of  their  sons  and  daughters  in 
case,  as  often  happens  through  the  mistakes,  miscalcula- 
tions and  accidents  of  life,  their  family  fortunes  come  to 
be  dissipated  and  their  children  fall  into  the  tenant  class. 
Do  such  property  owners  wish  to  make  economic  rehabili- 
tation and  home  ownership  for  their  children,  under  such 
circumstances,  as  difficult  as  possible?  Yet  this  is  the 
consequence  to  be  expected  from  high  salable  value  of 
land.  And  just  as  it  is  much  to  be  preferred  that  no  one 
of  us  should  be  permitted  to  own  slaves,  rather  than  that, 
in  case  of  misfortune,  our  children  should  be  able  to  sell 
themselves  into  slavery,  so  likewise  it  is  better  far  that 
the  landed  property  of  each  landowner  should  have  a 
smaller  salable  value  than  that  the  children  of  many  of 
them  should  be  able  to  sink  into  a  tenancy  made  hope- 
less by  high  land  prices. 

Before  quitting  the  general  topic  of  this  section,  let 
us  inquire  what  would  be  the  effect,  in  any  large  com- 
munity which  should  first  adopt  it,  say  the  State  of  Mis- 
souri, of  a  tax  system  such  as  the  foregoing  argument 
suggests.  Clearly,  the  value  of  land,  as  such,  would  rap- 
idly fall.  The  mere  speculative  holder  of  idle  land  would 
not  be  able  to  collect  the  toll  he  now  collects  from  those 
who  desire  to  build  homes  or  to  launch  business  enter- 
prises. The  ownership  of  homes  and  farms  would  be 
made  easier.  The  return  on  capital  investment  would  be 
increased.  Persons  in  other  states  who  had  accumulated 
capital  would  be  more  inclined  to  invest  or  lend  it  in 
Missouri.  The  inflow  of  capital  would  tend  to  an  in- 
crease in  the  number  of  buildings  and  in  the  amount 


110         Thu  Taxation  of  Unearned  Incomes 

of  machinery,  fruit  trees,  cattle,  etc.  The  increase 
of  buildings  would  eventually  tend  to  reduce  the  charges 
to  tenants.  The  increase  of  capital  in  general  would  tend 
to  make  labor  more  effective  and  to  raise  wages.  Mis- 
souri would  perhaps  first  become  a  more  desirable  state 
for  the  average  capitalist  to  invest  his  capital  in;  but  it 
would  quickly  become  a  more  desirable  state  for  the  aver- 
age non-capitalist  to  live  in.  The  inflow  of  capital  and  of 
population,  together  with  the  force  of  example,  would 
then  be  likely  to  start  a  movement  for  a  similar  tax  re- 
form in  those  neighboring  states  from  which  the  capital 
and  the  population  were  flowing. 

§  14 

Summary  and  Conclusion 

At  the  beginning  of  this  essay  it  was  shown  that 
land  rent  is  fixed  by  the  marginal  productivity  of  land  and 
is  a  surplus  over  the  interest  to  waiting  and  the  wages 
of  labor,  a  surplus  the  amount  of  which  cannot  be  in- 
creased by  the  owners  of  land  to  make  up  for  the  tak- 
ing by  taxation  of  any  per  cent,  of  it.  The  attempt  was 
then  made  to  distinguish  briefly  between  rent  of  land 
and  interest  on  other  capital.  The  situation  rent  of  land 
we  found  to  be  an  absolute  amount,  not  determined  by  the 
value  of  the  land  or  by  its  cost  of  production,  but  an  es- 
sential element  in  the  determination  of  the  value  of  the 
land.  The  value  of  reproducible  capital,  however,  was 
found  to  be  directly  determined,  in  large  part,  by  cost 
of  production,  analyzable  into  alternative  returns  of  the 
productive  factors  used.  The  productivity  of  capital  ap- 
peared to  be  an  important  influence,  perhaps  the  most 
important  direct-acting  influence,  fixing  the  rate  of  inter- 


Summary  and  Conclusion  111 

est.  It  further  appeared  that  the  interest  on  capital, 
when  this  capital  is  produced  and  saved  by  effort  and 
waiting  respectively,  and  when  it  is  used  in  socially  de- 
sirable ways,  is  earned.  The  interest  is  earned  in  the 
sense  that  the  effort  and  waiting  done  by  the  producer 
and  saver  of  the  capital  secure  for  the  community  as 
much  of  wealth  as  the  capitalist  receives  in  interest.  On 
the  other  hand,  the  situation  rent  of  land  appeared  to 
be  a  payment  for  benefits  due  to  natural  conditions  or 
to  social  growth  and  not  for  services  brought  into  exist- 
ence by  the  owner  of  the  land.  Thus,  the  rest  of  the 
community  is  perpetually  under  taxation  to  support  a 
class  of  landowners  from  whom,  as  such,  no  equivalent 
return  is  received.  The  landowner  who  has  bought  his 
land,  though  he  has  given  an  equivalent  for  it  in  value 
of  something  else,  nevertheless  cannot  be  said  to  give  a 
service  to  those  from  whom  he  derives  rent,  which  would 
not  equally  have  been  available  had  neither  he  nor  any 
other  landowner  ever  lived.  When  one  person  buys  land 
of  another,  he  simply  buys  the  privilege  of  collecting  a 
periodic  income  from  the  landless  masses  without  giving 
any  service  in  return.  So  far  as  these  masses  are  con- 
cerned, the  purchase  of  land  by  one  person  from  another 
is  but  a  change  of  masters,  a  change  of  parasites  of 
which  the  landless  masses  are  the  multitudinous  collec- 
tive host.  Hence  the  private  receipt  of  rent  violates  the 
utilitarian  principle  that  each  should  receive  remunera- 
tion or  income  only  in  proportion  to  service  rendered  to 
those  by  whom  the  remuneration  or  income  is  paid. 

In  the  course  of  our  study,  however,  it  became  neces- 
sary to  make  certain  criticisms.  The  so-called  rent  of 
land  is  not  all  an  unearned  income.  Part  of  it  is  really  in- 
terest on  the  cost  of  street-cutting,  paving,  etc.,  usually 


112        The  Taxation  of  Unearned  Incomes 

met  in  whole  or  in  part  by  special  assessments  on  owners 
of  contiguous  land.  Since  these  owners  of  land  chiefly 
benefit  through  a  resultant  increase  in  the  rental  and  sal- 
able value  of  their  land,  it  seems  just  that  they  should  bear 
special  assessments.  But  the  justification  of  their  hav- 
ing to  pay  these  special  assessments  depends  upon  their 
being  allowed  to  receive,  in  higher  rental  value  of  their 
land,  a  return  on  the  cost  of  the  assessments.  Various  al- 
leged services  of  city  landowners,  such  as  exercising 
control  over  the  class  of  tenants  in  any  locality,  or  seek- 
ing out,  developing,  and  advertising  new  sites,  were  next 
considered.  The  first  did  not  seem  to  be  a  service  for 
which  we  are  necessarily  dependent  on  landowners,  or,  in 
any  case,  a  service  so  costly  to  them  in  efifort  as  to  justify 
very  much  of  rent.  The  seeking  and  advertising  of  new 
sites  and  bringing  them  into  use  at  an  earlier  date  than 
their  advantages  would  otherwise  be  realized  may  some- 
times be  a  service  to  the  present  generation,  but  is  not 
clearly  a  service  to  later  generations  who  would  eventu- 
ally, with  growth  of  population,  have  taken  up  this  land 
anyway.  Hence,  if  this  is  a  service  justifying  rent  pay- 
ment, it  can  justify  such  payment  only  for  a  limited  time. 
It  is  like  the  service  of  an  inventor  who  gives  us,  some- 
what sooner  than  we  might  else  have  it,  the  benefit 
of  a  new  idea  in  mechanics,  and  to  whom  we  give  a  defi- 
nitely terminable  right  to  receive  royalties.  So,  also,  we 
were  unable  to  conclude  that  the  early  settlers  in  the 
American  West  had  rendered  any  such  economic  services 
as  to  entitle  their  descendants  and  successors  to  receive 
rent  for  all  future  time  from  the  descendants  of  later 
comers.  For  there  seemed  no  clear  indication  that  any 
benefit  was  received  or  is  being  received  by  the  later 
comers   or  their   descendants,    from   either   the   present 


Summary  and  Conclusion  113 

or  the  former  owners  of  the  land.  If  the  "benefit"  of 
rising  land  values  was  "diffused"  in  any  sense,  the  dif- 
fusion was  not  clearly  to  those  of  the  present  generation 
who  now  have  to  pay  rent  to  use  the  land.  They  may 
well  regard  themselves,  if  they  choose  to  recognize  the 
authority  in  the  matter  of  those  who  did  it  as  "sold  out" 
by  a  previous  generation. 

Nevertheless  we  concluded  that  increased  value  of  land 
resulting  from  increasing  population  which  forced  down 
the  margin  of  production  ought  not  to  be  made  an  ex- 
cuse for  so  taxing  land  rent  as  to  leave  with  incomes 
smaller  than  their  previously  earned  incomes  families 
which,  to  avoid  overcrowding  their  own  land,  had  re- 
frained from  rapid  multiplication.  The  increase  of 
those  whose  habits  or  ideals  would  eventually  tend  toward 
general  misery  ought  not  to  result  in  so  reducing  the 
available  space  for  cultivation  or  in  so  increasing  the 
tax  on  the  land  owned,  as  to  greatly  reduce  the  incomes 
of  a  non-parasitic  class  with  ideals  of  a  different  sort. 
This  last  consideration,  however,  seemed  to  tell  with 
but  little  force  against  the  high  taxation  of  city  or  near- 
city  land,  or  of  any  land  in  a  country  not  unduly  crowded, 
since  the  value  of  such  land  is  due  mainly  to  increase  of 
its  special  advantages  rather  than  to  a  lowering  of  the 
margin  of  production. 

A  consideration  of  the  probable  effects  of  high  taxation 
of  rent  indicated  that  such  a  policy  would  tend  in  the 
direction  of  wide  distribution  of  home  ownership  and 
away  from  tenancy.  Ownership  cannot  be  stimulated 
by  a  policy  which  makes  land  high  in  price. 

The  argument  that  taxation  of  land  values  should  not 
be  much  emphasized  because  there  are  other  differential 
and   unearned   incomes,   we   concluded   has   little    force. 


114        The:  Taxation  of  Unearned  Incomes 

Most  other  unearned  incomes,  such  as  those  secured  by 
monopoly  and  by  industrial  free-booting,  require  to  be 
terminated,  rather  than  to  be  continued  in  order  that 
their  recipients  may  be  taxed.  If  there  are  other  in- 
comes of  an  analogous  sort  to  land  rent,  the  possibilities 
of  taking  them  in  taxation  and  the  social  utility  of  taking 
them  should  be  separately  considered.  And  in  the  mean- 
while, the  possibility  of  there  being  other  unearned  in- 
comes is  no  more  an  adequate  objection  to  taxing  a  kind 
of  incomes  we  know  to  be  unearned,  than  is  the  possibility 
of  there  being  gentler  ways  of  stealing,  a  reason  why 
we  should  allow  highway  robbery  to  go  on  until  we  have 
reached  an  agreement  about  the  proper  way  to  deal  with 
all  forms  of  dishonesty.  Let  us  not  be  too  afraid  of  a 
transition  period  when  we  may  somewhat  discriminate 
between  different  sorts  of  unearned  incomes.  As  to 
whether  or  how  far  it  may  be  desirable,  during  a  tran- 
sition period,  to  levy  sharply  progressive  inheritance 
taxes  for  the  purpose  of  mitigating  the  inequality  which 
has  resulted  in  part  from  our  long  continued  policy  of 
permitting  the  private  receipt  of  unearned  wealth,  or  as 
to  whether  wholesale  evasions  of  such  taxes  could  be 
prevented,  no  opinion  is  here  expressed. 

To  avoid  the  objection  of  infringement  on  "vested 
rights,"  some  advocates  of  land-value  taxation  have  pro- 
posed that  only  future  increases  in  the  value  of  land 
should  be  specially  taxed.  But  this  proposal  seems  to 
ignore  the  fact  that  purchasers  often  pay  a  higher  price 
for  land  in  the  expectation  of  these  very  future  increases. 
How  then,  can  special  taxation  of  these  increases  be  any- 
thing else  than  an  infringement  of  "vested  rights?"  In 
truth,  however,  too  great  a  respect  for  the  "vested 
rights"  of  individuals  comes  perilously  near  to  meaning 


Summary  and  Conclusion  115 

no  rights  for  society.  It  might  be  interpreted  to  mean 
that  society  could  never  modify  any  poHcy  in  the  expecta- 
tion of  the  continuance  of  which  individuals  had  acted, 
without  giving  compensation.  It  might  be  interpreted  to 
mean  that  when  we  undertake  to  regulate  monopoly  price, 
we  must  compensate  the  purchasers  of  monopoly  stock, 
and  that  when  we  choose  to  remove  tariff  protection  we 
must  compensate  holders  of  the  stock  of  protected  in- 
dustries. If  society  is  not  bound  to  do  these  things,  nei- 
ther is  it  bound  to  go  on,  through  all  future  time,  pay- 
ing landowners  for  services  which  not  they  but  nature 
and  society  render.  The  community  has  frequently  dis- 
criminated, in  taxation,  among  different  kinds  of  com- 
modities and,  therefore,  among  consumers  of  such  com- 
modities. It  is  under  no  pledge  never  to  discriminate 
between  land  and  other  property.  In  some  places  a  cer- 
tain amount  of  such  discrimination  has  already  been  prac- 
ticed. Purchasers  of  land  should  be  presumed  to  have 
bought  their  land  on  the  understanding  that  tax  sys- 
tems may  be  changed  in  this  direction  at  the  option  of  the 
public.  It  may  be  desirable — as  it  is  certainly  altogether 
likely — that  any  great  change  should  be  made  gradually, 
but  that  society,  or  the  non-landowning  part  of  society, 
because  it  has  paid  in  the  past  for  no  service  received, 
must  either  go  on  doing  so  forever  or  must  buy  itself  free 
with  no  expense  or  loss  to  landowners,  is  a  doctrine  which 
even  those  who  favor  it  prefer  not  to  state,  and  doubt- 
less will  not  now  state,  frankly  and  without  equivoca- 
tion. 


APPENDIX 

§  1 

Suggestion  for  Legal  Enactment  or  Constitutional 

Amendment,  Especially  in  States  Having  the 

Initiative  and  Referendum 

Whereas,  the  possession  by  the  few  of  great  landed 
estates  beyond  the  possibiHty  of  their  own  use  is  a  prin- 
cipal source  of  inequality  and  a  danger  to  democracy, 
and 

Whereas,  the  value  attaching  to  land  apart  from  im- 
provements is  due  rather  to  population  growth  than  to  the 
efforts  of  the  individual  owners,  and 

Whereas,  the  holding  of  land  out  of  use  for  specula- 
tion or  to  aid  monopoly  operates  to  make  land  and  home 
ownership  difficult  for  the  many,  to  diminish  production, 
to  lower  wages,  and  to  cause  involuntary  idleness,  and 

Whereas,  taxes  on  buildings  and  improvements,  in- 
cluding fertility  put  into  land  by  the  owner,  and  on 
other  goods  which  are  produced  by  labor,  discourage 
improvement,  increase  rents,  restrict  the  supply  of  the 
taxed  goods  and  raise  their  prices ;  while  taxes  on  the 
value  of  land  force  idle  land  into  use,  encourage  improve- 
ment and  production,  reduce  rents,  enlarge  earned  in- 
comes and  increase  the  number  of  home  owners,  and 

Whereas,  taxes  on  the  shares  of  stock  of  corporations, 
held  by  individuals,  are  almost  uniformly  evaded ;  while 
taxes  on  the  mines,  gas  and  oil  wells,  valuable  sites  and 
other  landed  property  of  these  corporations  would  effect- 
ively reach  their  stockholders,  therefore 

(117) 


118        The  Taxation  of  Unearned  Incomes 

It  is  hereby  enacted  that  all  taxes  on  buildings,  ma- 
chinery, cattle,  fruit  trees,  growing  crops,  fertility  put 
into  the  land  by  any  owner  or  occupier  and  not  yet  prac- 
tically exhausted,  drainage  improvements,  stocks  and 
bonds,  money,  and  all  other  taxes  except  taxes  on  land 
shall  be  immediately  reduced  20  per  cent  and  thereafter 
by  a  like  amount  each  year  until  they  are  completely 
abolished,  and  that  the  necessary  revenues  for  state, 
counties,  cities,  towns,  villages,  school  districts  and  other 
units  shall  be  secured  by  a  tax  on  the  rental  value  of 
land  exclusive  of  the  value  of  improvements  in,  over  or 
under  such  land ;  but,  however  small  its  value,  no  land 
held  out  of  use  shall  be  entirely  untaxed,  and 

It  is  further  enacted  that  all  previous  constitutional 
limitations  on  the  rate  at  which  land  may  be  taxed,  are 
hereby  repealed. 

Provided,  however,  that  in  any  year  for  a  period  of 
fifteen  years  following  this  enactment,  any  person  whose 
real  estate  is  improved,  is  occupied  as  a  residence,  and 
does  not  exceed,  in  such  year,  $10,000  in  assessed  valua- 
tion, or  $20,000  if  it  is  agricultural  real  estate  actually 
worked  or  operated  as  a  farm,  may,  at  his  or  her  option, 
in  lieu  of  the  tax  hereinbefore  provided  for,  pay  a  tax 
on  all  his  or  her  property  which  would  be  taxable  under 
the  previous  law,  at  a  rate,  on  the  first  $5,000  of  such 
property,  of  8-10  the  average  rate  paid  by  him  or  her  to 
the  various  governmental  units,  state,  county,  etc.,  dur- 
ing the  last  years  preceding  this  enactment;  at  a 

rate,  on  the  second  $5,000,  equal  to  9-10  of  such  previous 
average  rate ;  and  at  a  rate,  on  the  rest  of  his  or  her  prop- 
erty, equal  to  such  average  rate.  But  no  option  in  taxa- 
tion shall  be  given  to  any  corporation,  nor  shall  any  op- 
tion be  given  to  any  natural  person  as  to  payment  of  taxes 


Appendix  119 

on  land  held  substantially  out  of  use,  notwithstanding 
such  person  may  live  on  such  land  in  a  tent  or  shack  for 
less  than  two-thirds  of  the  year.  Nor  shall  any  natural 
person  have  such  an  option  as  to  more  than  an  acre  of 
land  used  for  residence  only,  as  distinct  from  farming,  or 
as  to  two  or  more  non-contiguous  pieces  of  land. 

And  provided,  further,  that  nothing  herein  contained 
shall  operate  to  prohibit  such  taxation  of  estates  trans- 
ferred by  bequest  or  inheritance,  including  gifts  made 
in  anticipation  of  death,  as  the  legislative  body  may  think 
desirable. 


Rcaso)is  for  Proposed  Program 

The  average  man  does  not  know  much  political  econ- 
omy. He  persists  in  thinking  that  a  scheme  to  substi- 
tute a  tax  on  the  rental  value  of  land  for  other  taxes 
is  a  scheme  to  burden  the  farmer  and  the  small  home 
owner  and  to  relieve  of  taxation  persons  of  wealth; 
and  the  classes  interested  in  maintaining  the  existing  sys- 
tem play  upon  this  belief  so  as  effectively  to  prevent  re- 
form. Proposals  to  exempt  altogether  from  taxation 
small  farm  and  home  owners,  violate  fundamental  prin- 
ciples and  are  undesirable.  Such  proposals,  indeed, 
would  probably  meet  popular  opposition  rather  than 
favor.  The  very  success  of  land  value  taxation  in  break- 
ing up  large  estates  and  throwing  land  into  the  possession 
of  many  small  holders  might,  in  such  a  case,  so  reduce 
the  number  of  taxable  properties  as  to  make  impossible 
the  securing  of  sufficient  revenue.  So,  too,  proposals 
for  permanent  exemption  of  any  landowners,  even  of  a 


120        The  Taxation  of  Unearned  Incomes 

partial  nature,  are  undesirable.  We  do  not  know  what 
the  governmental  needs  of  future  generations  may  be. 
But  those  persons  whose  studies  have  brought  them  to 
the  conclusion  that  a  tax  on  the  rental  value  of  land 
would  be  a  lighter  burden  on  small  farmers  and  home 
owners  than  present  taxes,  cannot  very  consistently  ob- 
ject to  an  enactment  which,  in  effect,  merely  gives  assur- 
ance that  the  proposed  new  system  will,  in  its  inception, 
so  operate.  And  it  can  be  no  objection  to  such  an  assur- 
ance, that  it  may  make  a  desirable  reform  possible 
through  preventing  the  misrepresentation  of  its  probable 
results  by  an  interested  privileged  class.  Unless,  indeed, 
advocates  of  land  value  taxation  are  willing  to  include 
some  such  assurance,  in  their  program,  to  the  small  own- 
ers who  are  still  numerous  in  America,  and  who  are  not, 
and  cannot  be  expected  to  be,  political  economists,  it  is 
doubtful  whether  this  most  essential  of  all  economic  re- 
forms can  be  secured  for  generations,  if  ever.  And  a 
mere  assurance  of  a  special  rate  of  taxation  for  such  per- 
sons, would  not  do,  even  if  it  were  desirable.  The  assur- 
ance must  be  to  the  effect  that  their  taxes  under  the  pro- 
posed system  will  not  be  burdensome  in  comparison  with 
their  taxes  under  the  present  system.  But  if  advocates 
of  the  taxation  of  the  rental  value  of  land  are  willing  to 
include  such  assurance  as  a  prominent  part  of  their  pro- 
gram, success  may  be  near.  The  advocate  of  land  value 
taxation  need  not  then  do  all  the  explaining.  His  oppo- 
nents will  have  the  task  of  trying  to  explain  to  per- 
sons of  common  sense,  that  a  reduction  in  their  taxes  will 
hurt  them.  How  far  will  these  opponents  get  in  persuad- 
ing home  owners  and  working  farmers  that  they  should 
pay  high  taxes  and  the  land  speculators  low  taxes  in 
order  that  land  may  be  kept  out  of  use  and  in  order  that 


Appendix  121 

land  prices  may  be  kept  high?  If  the  owners  of  the 
sources  of  iron  ore,  the  coal  mine  owners,  and  other  big 
landed  interests  succeed  for  a  while  in  blocking  the  way, 
it  may  be  necessary  to  offer  larger  or  longer-continued 
concessions  to  the  small  home  owner  and  farmer.  When, 
however,  it  becomes  evident  to  these  large  interests  that 
they  are  bound  to  lose  and  that  delay  may  only  make  their 
loss  the  greater,  their  opposition  is  likely  to  weaken.  At 
any  rate,  if  some  such  program  is  adopted  as  has  been 
above  suggested,  the  politicians  who  choose  to  oppose  the 
reform  cannot  successfully  pretend  to  be  so  doing  in  the 
interest  of  workingmen,  home  owners,  and  small  farmers, 
but  must,  tacitly  if  not  frankly,  admit  that  they  are  the 
spokesmen  of  the  large  landowners,  including  the  pow- 
erful corporations  which  control  our  mineral  resources. 


INDEX. 


Assessments,  on  landowners,  for 
street  construction,  etc.,  in  re- 
lation to  justification  of  land 
rent,  60 — 63. 

B 

Brown,  Principles  of  Commerce, 
cited,  79;  Tht  Theory  of 
Earned  and  Unearned  In- 
comes, cited,  8,  19,  51,  93. 


Clark,       The      Distribution      of 

JVealth,  cited,   68. 
Class    interests,    fhe    conflict    ol, 

3-8. 

D 

Davenport,  H.  J.,  article  by,  cit- 
ed, 69,  90;  Exercises,  cited,  90. 

E 

Excess  profits,  the  taxation  of, 
versus  the  taxation  of  land 
rent,  96 — 97. 

Eugenics,  relation  of,  to  inequal- 
ity,  13- 


Fillebrown,  The  A  B  C  of  Tax- 
ation, cited,  102. 

Fisher,  The  Nature  of  Capital 
and  Income,  cited,  55,  io6n. 


George,    Progress    and    Poverty, 
quoted,   28 — 34;    cited   87,   91. 

H 
Hadley,    Economics,  cited,   65. 


Income,  the  rent  of  land  as  an 
unearned,    56 — 60. 

Incomes,  earned  and  unearned, 
15 — 41;  earned  and  unearned, 
inequality  and  taxation,  3 — 
49;  inequality  of  earned,  41 — 
45 ;  unearned,  contention  that 
there  are  others  not  associated 
with  land,  76 — 81. 

Increment,  of  land  values,  in  re- 
lation to  the  settlement  of  the 
American  West,  67 — 76 

Increments,  of  land  value,  taxa- 
tion of  future,  81 — 84. 

Inheritances,    taxation    of,    98 — 

ICX3. 

Inequality,  of  earned  incomjs, 
41 — 45 ;  in  relation  to  the 
price  system,   10 — 15. 

Interest,  on  capital,  explained 
and  justified,  19 — 24. 


Johnson,  A.  S.,  article  by,  cited, 
95. 


Land.    See  Rent,  Taxation. 

M 

Mill,  J.  S.,  advocacy  of  taxation 
of  future  increases  in  land 
values,  cited,  82. 


Physiocrats,  doctrine  of,  regard- 
ing shifting  of  taxes,   54n. 

Price  system,  and  specialization 
of  producers,   8 — 15. 

Profits,  wages  and,  15 — 19. 


(123) 


124 


Index 


R 


Rent  of  land,  o.stinguished  from 
interest  on  capital,  24 — 26, 
54 — 56;  fair  taxation  of,  in 
case  of  undue  increase  of 
population,  73 — 76;  how  it 
arises,  28 — 34;  impossibility 
of  preventing  private  receipt 
of,  except  by  taxation, 
36 — 38;  as  a  marginal  pro- 
duct of  land,  51 — 54;  some 
probable  results  of  making  it 
the  chief  source  of  public  rev- 
enues, loo — lie;  in  relation 
to  services  of  city  landowners, 
63 — 67;  in  relation  to  special 
assessmen's  for  street  construc- 
tion, etc.,  60 — 63  ;  tax  on,  not 
shiftable,  38 — 41,  53 — 54;  and 
its  taxation,  51 — 115;  taxa- 
tion of  "excess  profits"  versus 
taxation  of,  96 — 97;  as  an 
unearned  income,  56 — 60. 
See  Taxation. 


Seager,  Principles  of  Economics, 
cited,   18. 

Seligman,  Principles  of  Econo- 
mics, cited,  27- 

Speculation  in  land,  alleged  ad- 
vantage of,  discussed,  io6n; 
effect  of  taxation  of  land  val- 
ues upon,  41,  53,  77,  loi. 

Specialization,  of  producers,  the 
price  system  and,  8 — 15. 

Socialism,  9 — 10;  view  of,  re- 
garding interest,  stated  and 
criticized,  19 — 24;  retardation 
of  sane  economic  reform  from 
growth  of  influence  of,  92 — 93. 


Tax.     See  Taxation. 

Taxation,  ability  theory  of,  93 — 
96:  earned  and  unearned  in- 
comes,   inetjuaiity   and,   3 — 49; 


of  "exceso  profits"  versus  of 
land  rent,  96 — 97;  of  future 
increments  of  land  value,  81 — 
84;  of  inheritances,  98 — 100; 
as  only  means  of  preventing 
private  receipt  of  land  rent, 
36 — 38;  proposal  for  reform- 
ing enactment,  117 — 119  (Ap- 
pendix) ;  reasons  for  specific 
reform  proposal,  119 — i2i 
(Appendix)  ;  rent  of  land  and 
its,  51 — 115;  of  land  rent,  can 
not  be  shifted,  38 — 41,  53 — 
54 ;  of  land  rent,  in  case  of 
undue  increase  of  population, 
73 — 76 ;  of  land  rent,  effect  of, 
on  amount  of  tenancy,  105 — 
109;  of  land  rent,  effect  of,  on 
community  development,  109 — 
no;  of  land  rent,  effect  of,  on 
farmers,  loi — 108;  of  land 
rent,  some  probable  effects  of 
making  it  the  chief  source  of 
public  revenues,  100 — no;  of 
land  values,  effect  of,  on  spec- 
ulative liolding  of  land,  41,  53, 
77,  loi ;  of  land  values,  in  re- 
lation to  the  theory  of  vested 
rights,   84. — 93- 

Taussig,  Principles  of  Economics, 
cited.   82. 

Tenancy,  effect  of  land  value 
taxation  in  reducing,  105 — 109. 

U 

Unearned  incomes,  contention 
that  there  are  others  not  as- 
sociated  with    land,    76 — 81. 


Vested  Rights,  land  value  taxa- 
tion 'n  relation  to  the  thenrv 
of.  84-0^- 

W 

Wages,  and  profits,  15 — 19. 
Walker,  Political  Economy,  Ad- 
vanced  Course,   cited,   82. 


The  following  pages  contain  a  description  of  and  quo- 
tations from  reviews  of  the  author's  book  on  The  Theory 
of  Earned  and  Unearned  Incomes. 


THE  THEORY  OF  EARNED  AND  UNEARNED 
INCOMES 

In  these  days  of  Bolshevism  and  syndicahsm  on  the  one 
hand  and  of  reactionary  influences  on  the  other,  it  is 
perhaps  more  than  ever  important  that  students  of  eco- 
nomics should  get  a  thorough  understanding  of  the  prin- 
ciples underlying  our  economic  organization.  The  The- 
ory of  Earned  and  Unearned  Incomes,  by  Harry  Gunni- 
son Brown  of  the  University  of  Missouri,  aims  to  pre- 
sent these  principles.  It  sharply  distinguishes  types  of 
incomes  which  the  Marxian  theory  of  socialism  lumps 
together  as  "surplus  value"  and  which  ought  not  to  be 
dealt  with  alike.  Yet  its  discussion  of  unearned  incomes 
will  be  as  little  pleasing  to  conservatives  as  to  Bolshevists 
and  other  Marxians. 

We  are  of  the  opinion  that  Professor  Brown's  book 
is  well  adapted  for  use  in  college  and  university  courses 
on  Economic  Theory  and  on  the  Theory  of  Distribution 
and  in  courses  devoted  to  a  critical  examination  of  eco- 
nomic reform  movements.  The  theoretical  student  will 
be  particularly  interested,  we  believe,  in  the  exhaustive 
discussion  of  the  causes  of  and  the  rate  of  interest.  This 
discussion  is  a  further  elaboration  of  articles  contributed 
by  the  author  to  the  Quarterly  Journal  of  Economics  and 
the  American  Economic  Review.  The  "roundaboutness" 
of  production,  the  productivity  of  capital,  "impatience" 
or  "time-preference,"  fluctuations  in  the  general  price 
level,  and  the  significance  of  changes  in  bank  reserves 
are  all  given  consideration.  Besides  the  forces  determin- 
ing interest,  those  determining  wages  are  also  studied, 
and  very  considerable  attention  is  given  to  the  theory  of 
the  rent  of  land  and  its  taxation. 


The  late  William  Marion  Reedy  said  of  this  book,  in 
Reedy's  Mirror :  "The  volume  is  as  interesting  a  book  on 
economics  as  I  have  read  in  many  years.  It  is  a  singularly 
well  articulated,  closely  knit,  logical  performance."  The 
Public  said  of  it :  "This  book  should  be  welcomed  not 
only  by  philosophic  radicals  but  by  all  who  seriously 
wish  to  understand  the  nature  of  the  germ  behind  the 
fever  of  discontent  which  now  threatens  the  life  of  our 
civilization."  The  Duluth-Herald  has  asserted  that  "it 
is  like  a  breath  of  fresh  air  in  the  musty  realm  of  eco- 
nomics and  sociology." 

CHAPTER  TITLES 


Introduction — The  Point  of  View. 

Chapter  I.       The  Determination  of  Value. 

Chapter  II     Ultimate  Determinants  of  Value. 

Chapter  III.  The  Causes  of  Interest. 

Chapter  IV.  The  Rate  of  Interest. 

Chapter  V.     Wages  and  Population. 

Chapter  VI.  The  Rent  of  Land  and  Its  Taxation. 


THE  THEORY  OF  EARNED  AND  UNEARNED 
INCOMES 

Cloth,  8vo,  258  pages,  $2.50. 

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